OTP Bank
Annual Report 2022

Plain-text annual report

OTP BANK PLC INTEGRATED ANNUAL REPORT 2022 (AS DEFINED IN ACT CXX OF 2001 ON THE CAPITAL MARKET) BUDAPEST, 28 APRIL 2023 INTEGRATED ANNUAL REPORT 2022 Dear Shareholders! OTP Bank Plc. hereby provides you with the Integrated Annual Report of OTP Bank Plc. for the year 2022, which is based on the audited financial statements approved by the Annual General Meeting of the Company on 28 April 2023. On behalf of OTP Bank Plc. we declare that, to the best of our knowledge, the separate and consolidated financial statements which have been prepared in accordance with the applicable accounting standards, present a true and fair view of the assets, liabilities, financial position and profit and loss of OTP Bank Plc. and its consolidated subsidiaries and associates, and give a fair view of the position, development and performance of OTP Bank Plc. and its consolidated subsidiaries and associates, describing the principal risks and uncertainties, and do not conceal facts or information which are relevant to the evaluation of the Issuer’s position. 28 April 2023, Budapest dr. Sándor Csányi Chairman & CEO László Bencsik Deputy CEO INTEGRATED ANNUAL REPORT 2022 2 CONTENTS CHAIRMAN GREETINGS ................................................................................................................................................ 4 BUSINESS REPORT 2022 (SEPARATE) ............................................................................................................................ 5 BUSINESS REPORT 2022 (CONSOLIDATED) .................................................................................................................. 28 INDEPENDENT AUDITORS’ REPORTS 2022 (CONSOLIDATED AND SEPARATE, IN ACCORDANCE WITH IFRS) ............... 177 SEPARATE FINANCIAL STATEMENTS IN ACCORDANCE WITH IFRS (2022) .................................................................. 200 CONSOLIDATED FINANCIAL STATEMENTS IN ACCORDANCE WITH IFRS (2022) .......................................................... 339 OTHER INFORMATIONS ............................................................................................................................................ 549 CORPORATE GOVERNANCE ....................................................................................................................................... 550 SUSTAINABILITY REPORTING ANNEX ......................................................................................................................... 559 UNEP FI PRINCIPLES FOR RESPONSIBLE BANKING REPORT ........................................................................................ 569 INDEPENDENT ACCOUNTANT’S ASSURANCE REPORT ON SUSTAINABILITY REPORTING ............................................. 576 INTEGRATED ANNUAL REPORT 2022 3 CHAIRMAN GREETINGS GRI 2-22 … We have taken a number of important steps towards meeting and fulfilling our sustainability goals and commitments in the recent period. Our foreign subsidiaries have prepared their own respective ESG strategies, set out their medium term goals and specified the proportions of their contributions to the group's priority objective of building up a HUF 1,500 billion green loan portfolio by 2025. To ensure that our plans are effectively implemented and facilitate our technical and professional work we have formed local ESG organisations, in view of the subsidiaries' specifics. The efforts of the past few years have yielded palpable results in sustainability: OTP Bank was the first financial institution in Hungary to receive supervisory approval for the introduction of a corporate green lending framework based on international standards and to issue green bonds in the summer of 2022. Successful fund raising was – in view of the macroeconomic expectations – far from being self-evident, but we experienced considerable interest and definite confidence on the part of investors in the CEE region, including Hungary. In green lending we had built up the HUF 230 billion target portfolio by end-2022, made up for the most part by corporate green bonds, besides project financing and FGS Green Home Programme loans. A number of other green products are planned to be introduced by the group as part of the transition to a low carbon economy. In the context of our ESG strategy we pay particular attention to implementing our social sustainability goals, therefore we have set ourselves important strategic goals and performance indicators in this segment as well. We are convinced that the only way to success for the OTP Group is through close cooperation with its employees, with a view to individual and community goals and values, therefore we continue to lay particular emphasis on strengthening our employees' engagement. Development of the financial literacy has – in view of the challenges brought on by year 2022 – become more urgent and necessary than ever before and, being a responsible company, we play a major role in disseminating knowledge on the ways financial and economic processes affect people's everyday finances; organisations associated with the OTP Group organised trainings and programmes aimed at providing information and transferring knowledge, to tens of thousands of young people. In spite of the war in Ukraine we maintained our financial services – the coherent community of the OTP Group and its employees spared no effort to provide our Ukrainian colleagues and their families, as well as refugees forced to leave their home country, with the most effective assistance possible. We provided Ukrainian customers with a variety of favourable terms and conditions and simplified administrative procedures and worked as hard as we could on delivering all kinds of supports and donations, including those received from our customers. This document is the OTP Group’s first Integrated Report. You are kindly invited to review the following pages to see the Banking Group's financial results and its activities promoting sustainable development. Yours sincerely, Dr. Sándor Csányi Chairman and CEO INTEGRATED ANNUAL REPORT 2022 4 BUSINESS REPORT 2022 (SEPARATE) INTEGRATED ANNUAL REPORT 2022 5 OTP BANK BUSINESS REPORT 2022 (SEPARATE) SEPARATE STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 2022 (in HUF million) Note 31 December 2022 31 December 2021 Cash, amounts due from banks and balances with the National Bank of Hungary Placements with other banks, net of allowance for placement losses Repo receivables Financial assets at fair value through profit or loss Financial assets at fair value through other comprehensive income Securities at amortised cost Loans at amortised cost Loans mandatorily measured at fair value through profit or loss Investments in subsidiaries Property and equipment Intangible assets Right of use assets Investment properties Deferred tax assets Current tax assets Derivative financial assets designated as hedge accounting Other assets TOTAL ASSETS Amounts due to banks and deposits from the National Bank of Hungary and other banks Repo liabilities Deposits from customers Leasing liabilities Liabilities from issued securities Financial liabilities designated at fair value through profit or loss Derivative financial liabilities designated as held for trading Derivative financial liabilities designated as hedge accounting Deferred tax liabilities Current tax liabilities Provisions Other liabilities Subordinated bonds and loans TOTAL LIABILITIES Share capital Retained earnings and reserves Treasury shares 5. 6. 7. 8. 9. 10. 11. 11. 12. 13. 13. 14. 34. 34. 15. 16. 17. 18. 19. 20. 21. 22. 23. 34. 34. 24. 24. 25. 26. 27. 28. 1,092,198 474,945 2,899,829 246,529 410,012 797,175 3,282,373 4,825,040 793,242 1,596,717 94,564 69,480 39,882 4,207 35,742 1,569 47,220 329,752 2,567,212 33,638 246,462 641,939 3,071,038 4,032,465 662,012 1,573,008 81,817 62,161 17,231 4,328 - - 17,727 224,488 16,565,531 13,710,471 1,736,128 408,366 11,119,158 41,464 498,709 16,576 373,401 50,623 - 3,199 29,656 313,188 294,186 1,051,203 86,580 9,948,532 17,932 22,153 20,133 192,261 18,690 1,507 4,776 21,527 238,437 271,776 14,884,654 11,895,507 28,000 1,655,601 (2,724) 28,000 1,845,836 (58,872) TOTAL SHAREHOLDERS' EQUITY 1,680,877 1,814,964 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY 16,565,531 13,710,471 INTEGRATED ANNUAL REPORT 2022 6 OTP BANK BUSINESS REPORT 2022 (SEPARATE) SEPARATE STATEMENT OF PROFIT OR LOSS FOR THE YEAR ENDED 31 DECEMBER 2022 (in HUF million) Interest Income: Interest income calculated using the effective interest method Income similar to interest income Interest income and similar to interest income total Interest Expense: Interest expenses total NET INTEREST INCOME Loss allowance on loan, placement and repo receivables losses Loss allowance on securities at fair value through other comprehensive income and on securities at amortised cost Provision for loan commitments and financial guarantees given Change in the fair value attributable to changes in the credit risk of loans mandatorily measured at fair value through profit of loss Risk cost total 6., 7., 11., 30. 9., 10., 30. 24., 30. 45.4. Note 29. 29. Year ended 31 December 2022 Year ended 31 December 2021 721,679 377,231 1,098,910 302,373 105,663 408,036 29. (802,020) (155,491) 296,890 252,545 (47,687) (38,841) (53,238) (5,541) 11,872 (94,594) (1,484) (130) (16,255) (56,710) NET INTEREST INCOME AFTER RISK COST 202,296 195,835 LOSSES ARISING FROM DERECOGNITION OF FINANCIAL ASSETS MEASURED AT AMORTISED COST MODIFICATION LOSS Income from fees and commissions Expenses from fees and commissions NET PROFIT FROM FEES AND COMMISSIONS Foreign exchange gains and (losses) (Losses) and gains on securities, net Losses on financial instruments at fair value through profit or loss Gains on derivative instruments, net Dividend income Other operating income Other operating expenses NET OPERATING INCOME Personnel expenses Depreciation and amortization Other administrative expenses OTHER ADMINISTRATIVE EXPENSES PROFIT BEFORE INCOME TAX Income tax PROFIT AFTER INCOME TAX Earnings per share (in HUF) Basic Diluted 4. 31. 31. 32. 32. 32. 32. 32. 33. 33. 33. 33. 33. 34. 43. 43. INTEGRATED ANNUAL REPORT 2022 (56,195) (14,856) 362,444 (66,087) 296,357 541 (10,605) (18,790) 9,917 194,526 13,775 (131,942) 57,422 (154,303) (46,738) (290,989) (492,030) (7,006) 13,638 6,632 24 24 (2,700) (7,017) 300,803 (52,276) 248,527 (5,638) 2,104 (6,494) 3,436 99,037 11,265 (41,636) 62,074 (136,126) (40,692) (178,611) (355,429) 141,290 (15,951) 125,339 455 455 7 OTP BANK BUSINESS REPORT 2022 (SEPARATE) SEPARATE STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR ENDED 31 DECEMBER 2022 (in HUF million) Note Year ended 31 December 2022 Year ended 31 December 2021 PROFIT AFTER INCOME TAX 6,632 125,339 Items that may be reclassified subsequently to profit or loss: Fair value adjustment of debt instruments at fair value through other comprehensive income Deferred tax (9%) related to fair value adjustment of debt instruments at fair value through other comprehensive income Gains / (Losses) on separated currency spread of financial instruments designated as hedging instrument Deferred tax (9%) related to (losses) / gains on separated currency spread of financial instruments designated as hedging instrument (Losses) / Gains on derivative financial instruments designated as cash flow hedge Deferred tax (9%) related to gains on derivative financial instruments designated as cash flow hedge Items that will not be reclassified to profit or loss: Gains on equity instruments at fair value through other comprehensive income Fair value adjustment of equity instruments at fair value through other comprehensive income 34. 34. 34. Deferred tax (9%) related to equity instruments at fair value through other comprehensive income 34. Total TOTAL COMPREHENSIVE INCOME (55,803) (37,163) 5,185 (4,887) 440 (5,641) - 2,675 61 (41) (58,011) (51,379) 3,410 1,681 (151) (6,307) - - 1,407 (281) (37,404) 87,935 INTEGRATED ANNUAL REPORT 2022 8 OTP BANK BUSINESS REPORT 2022 (SEPARATE) POST-BALANCE SHEET EVENTS Post-balance sheet event cover the period until 17 February 2023. Hungary • On 4 January 2023 OTP Bank announced that the National Bank of Hungary imposed the below additional capital requirements for OTP Group, on consolidated level, effective from 1 January 2023 until the next review: o 1.13 pps in case of the Common Equity Tier1 (CET1) capital, accordingly the minimum requirement for the consolidated CET1 ratio is 5.63% (without regulatory capital buffers); o 1.50 pps in case of the Tier1 capital, accordingly the minimum requirement for the consolidated Tier1 ratio is 7.50% (without regulatory capital buffers); o 2.00 pps in case of the Total SREP Capital Requirement (TSCR), accordingly the minimum requirement for the consolidated capital adequacy ratio is 10.00% (without regulatory capital buffers). • On 23 January 2023 the Ministry of Economic Development announced that the Gábor Baross Reindustrialization Loan Programme will be launched from February by Eximbank, with a total available amount of HUF 700 billion. Under the scheme, the HUF and EUR denominated loans will be available for all purposes, depending on the loan amount either through commercial banks or directly through Eximbank, but all the funding need will be provided or refinanced by Eximbank. The interest rate of the loans will be fixed throughout the whole tenor, and will be typically maximum 6% in the case of HUF loans and maximum 3.5% in the case of EUR loans. • On 24 January 2023 the National Bank of Hungary kept the reference rates unchanged . The NBH held a long-term deposit tender on 25 January, and from 1 February discount bill auctions are held on a weekly basis. The NBH said that it will continue to meet foreign currency liquidity needs in the coming months to reach market balance related to the energy account. Furthermore, the Deputy Governor announced that effective from April the mandatory reserve requirement for banks will be increased from 5% to 10%. • On 27 January 2023 S&P Global Ratings lowered the long- and short-term foreign and local currency sovereign credit ratings on Hungary to 'BBB-/A-3' from 'BBB/A-2'. The outlook on the long-term ratings is stable. • According to the press release published on 30 January 2023 by S&P Global Ratings, the rating agency downgraded its long- and short-term issuer credit ratings, as well as the long- and short-term resolution counterparty ratings on OTP Bank Plc. and OTP Mortgage Bank Ltd. to 'BBB-/A-3' from 'BBB/A-2', and the senior preferred debt rating of OTP Bank Plc. was also downgraded by one notch to 'BBB-'. The outlook on the long-term issuer ratings is stable. • The financial completion of the transaction to purchase 100% shareholding of Nova KBM d.d. and its subsidiary in Slovenia – after obtaining all necessary regulatory approvals – has been completed on 6 February 2023. • According to the press release published on 6 February 2023 by Moody’s Investors Service, the rating agency concluded the ratings review initiated in July 2021. The rating agency downgraded OTP Bank’s subordinated bond rating by one notch to 'Ba2' from 'Ba1'. All other ratings and assessments of OTP Bank have been affirmed. Outlook is stable. At the same time, Moody’s Investors Service downgraded the backed long-term domestic currency issuer rating of OTP Mortgage Bank to 'Baa3' from 'Baa2'. All other ratings and assessments of OTP Mortgage Bank have been affirmed. Outlook is stable. • On 15 February 2023 as value date OTP Bank issued Tier 2 Notes in the aggregate nominal amount of USD 650 million. The Tier 2 Notes with 10.25 years maturity, redeemable at par any time during the 3-month period prior to the Reset Date at 5.25 years, were priced on 8 February 2023. INTEGRATED ANNUAL REPORT 2022 9 OTP BANK ACQUISITIONS BUSINESS REPORT 2022 (SEPARATE) On 6 December 2021 OTP Bank signed an acquisition agreement with Alpha International Holdings Single Member S.A. on purchasing 100% shareholding of Alpha Bank SH.A., the Albanian subsidiary of the Greek Alpha Bank S.A. The purchase price has been agreed at EUR 55 million. The financial closing of the transaction was completed on 18 July 2022. On 31 May 2021 OTP Bank signed a share sale and purchase agreement on purchasing 100% shareholding of Nova KBM d.d. and its subsidiary, which are 80% owned by funds managed by affiliates of Apollo Global Management, Inc. and 20% by EBRD. The financial closing of the transaction took place on 6 February 2023, after obtaining all the necessary regulatory approvals. On 12 December 2022 OTP Bank signed a purchase and sale contract for the purchase of the majority stake of Ipoteka Bank and its subsidiaries with the Ministry of Finance of the Republic of Uzbekistan. OTP Bank will purchase 100% of the shares held by the Ministry of Finance of the Republic of Uzbekistan (nearly 97% total shareholding) in two steps: 75% of the shares now and the remaining 25% three years after the financial closing of the first transaction. The financial closure of the first transaction is expected in 1H 2023 subject to obtaining all the necessary regulatory approvals. The the Nova KBM acquisition completed in February 2023 and the pending acquisition of Ipoteka Bank in Uzbekistan (expected to be financially closed in 2Q) may substantially contribute to the consolidated profit after tax; in addition to this, the expected positive after tax effect of one-off items to be booked in relation to the consolidation of Nova KBM (badwill, PPA, initial risk cost, etc.) might reach EUR 230 million. MACROECONOMIC OVERVIEW The rapid recovery following the Covid crisis has created capacity bottlenecks in many sectors, which, coupled with rising commodity and energy prices, have significantly increased inflation in advanced economies. In the USA, the rate of inflation has not been at this level since the 1970s. The rapidly rising and increasingly broad-based inflation prompted the Fed to take action and to become the first major central bank to start raising interest rates. This move has significantly strengthened the dollar, and US 10 -year yields rose to 4.3%. In the USA, inflation clearly peaked in mid-2022, and has been on a downward trend since then. Inflation also rose rapidly in Europe, where the dramatically growing gas and electricity prices posed the bigger problem. However, inflation also peaked in the euro area by the end of 2022, and has been on a downward trend since October 2022. As the Russia-Ukraine war had a much stronger impact on Europe’s economic outlook, and the labour market was much less tight than in the USA, the ECB was slower to react to the rise in inflation. Still, European short-term interest rates also rose to 2% by the end of 2022. The USA went into a technical recession in the first half of 2022, but this turned out to be temporary, and the US economy resumed growth in the second half-year. Europe’s economies proved more resilient than had been expected to the effects of the Russia-Ukraine war. In the first half of the year, growth benefited from the sectors that recovered after the pandemic, but the currency area also avoided recession in the second half of the year, and grew by 3.5% in full year 2022. The main factor that affected Hungary’s economy in 2022 was the war in a neighbouring country. Although the Hungarian economy grew by 8.2% year-on-year in the first quarter and by 6.5% in the second, this was largely fuelled by massive one-off transfers at the beginning of 2022. By the second half of the year, however, the economy had lost steam and entered technical recession (two consecutive quarters of economic contraction) by the end of 2022. As a result, the Hungarian economy grew by 4 .6% in 2022 as a whole. Inflation, which went beyond 20% by the end of the year, played a significant role in the downturn, significantly eroding real income, and turning its growth negative by the end of 2022. The strong domestic demand at the beginning of the year allowed businesses to pass through the ongoing cost shocks to prices. From the second half of the year, a number of administrative measures (tightening of KATA tax rules, windfall taxes, increasing the public heath product tax, scrapping some pr ice caps, etc.) also boosted inflation. As a consequence, Hungary’s inflation decoupled from the developments in the euro area, where inflation peaked around 10%, and from the CEE region, where it peaked at 15 -17%. In Hungary, inflation did not peak in 2022. Given that Hungary is a major net energy importer, the sharp rise in energy prices has significantly worsened the Hungarian economy’s external balance, which put the forint under depreciation pressure. In addition, the continued delay in agreeing on EU funds has increased the risk premium on HUF assets, which also contributed to the forint’s weakening – the MNB could reverse this only by a drastic interest rate hike, when the EUR/HUF was nearing 435. As a result, the effective reference rate rose to 18%. The falling gas prices, and the agreement reached with the EU at the end of 2022 had a benign effect on the HUF’s exchange rate. INTEGRATED ANNUAL REPORT 2022 10 OTP BANK BUSINESS REPORT 2022 (SEPARATE) Falling real incomes and high interest rates have considerably slowed credit market growth. The housing loan market saw the sharpest slowdown: by the end of 2022 (as the Green Home Programme credit line ended), the contracted amount had fallen to half of the level seen in 2021. Despite the rapidly eroding real incomes, household consumption was still relatively buoyant. But this came at a price: households’ ability to save has sharply fallen. Outflows from demand deposits was particularly strong; these amounts flowed into foreign currency deposits and investment fund units. DIGITAL AND IT INNOVATIONS OTP Bank broadens the range of remotely available services continually. By the end of 2022 more than 1.7 million customers have registered to the Digital Contract, which allows them to sign up for further digital services via fully online processes. In 2022 OTP Bank developed a unique electronic document signing option for the users of the InternetBank. Taking advantage of the strong customer authentication of the netbank platform, our clients can sign on their contracts initiated in the Contact Center. The new MobilBank serving our retail clients with extensive functionality replaced the previously applied solution completely in March 2022. The new app offers several innovative functions such as: QR-code based cheque payment, Apple Pay integration, credit card installment and OpenBanking option for handling external balances and account information. The Bank focuses on the continuous upgrades of the Personal Finance Management (PFM) toolset, which supports our users in making more conscious financial decisions. The expense tracker service is already capable of handling user generated, personalized categories as well. The constant ascent in the ratio of our digitally active clients is supported by targeted online campaigns and continuous user education. Machine learning algorithms help the Bank processing all digital data for displaying relevant, personalized offers to the clients. Several products are available via end-to-end online processes for example: retail clients can open a new account with selfie-identification, or contract for a personal loan or travel insurance digitally. The ratio of personal loan applications submitted online has risen from 30 to almost 40 percent during 2022. VideoBank provides consulting service and application process for mortgages as well. We receive d numerous positive feedback from clients using the channel. Our customers have access to the chat feature on the website and via our internet banking service as well, therefore we serve client needs also via identified conversations. Most popular topics r aised with customer service are managed by chatbots: by 2022 we already have 35 live end-to-end chatbot processes which provide our clients with automated support around the clock. In the branch network, paperless administration is supported by the digital signature pads available in all OTP branches, which were already used by 2.4 million customers. Signature pads’ self-learning function contributes to a faster verification making branch processes even more effective. The branch network and the Contact Center uses the same user-friendly front-end system, which handles majority of all business processes, hence shortens the time of training and development. BRANCH NETWORK OF OTP BANK The Bank provides a full range of commercial banking services through a nationwide network and its branches are available to customers in Hungary. 1013 Budapest, Alagút utca 3. 1025 Budapest, Szépvölgyi út 4/b. 1055 Budapest, Szent István krt. 1. 1011 Budapest, Iskola utca 38-42. 1039 Budapest, Heltai Jenő tér 2. 1051 Budapest, Nádor utca 16. 1015 Budapest, Széna tér 7. 1037 Budapest, Bécsi út 154. 1054 Budapest, Szabadság tér 7-8. 1024 Budapest, Fény utca 11-13. 1033 Budapest, Szentendrei utca 115. 1066 Budapest, Oktogon tér 3. 1025 Budapest, Törökvész út 1/a 1041 Budapest, Erzsébet utca 50. 1075 Budapest, Károly krt. 1. 1026 Budapest, Szilágyi Erzsébet fasor 121. 1048 Budapest, Kordován tér 4. 1076 Budapest, Thököly út 4 1021 Budapest, Hűvösvölgyi út 138. 1042 Budapest, Árpád út 63-65. 1075 Budapest, Károly krt. 25. 1033 Budapest, Flórián tér 15. 1052 Budapest, Deák Ferenc utca 7-9. 1085 Budapest, József krt. 33. INTEGRATED ANNUAL REPORT 2022 11 OTP BANK BUSINESS REPORT 2022 (SEPARATE) 1085 Budapest, József krt. 53. 1211 Budapest, Kossuth Lajos utca 99. 5650 Mezőberény, Kossuth Lajos tér 12. 1087 Budapest, Könyves Kálmán krt. 76-1. 1221 Budapest, Kossuth Lajos utca 31. 5820 Mezőhegyes, Zala György ltp. 7. 1081 Budapest, Népszínház utca 3-5. 1222 Budapest, Nagytétényi út 37-45. 5720 Sarkad, Árpád fejedelem tér 5. 1083 Budapest, Futó utca 35-45 7621 Pécs, Rákóczi út 44. 5940 Tótkomlós, Széchenyi utca 4-6. 1191 Budapest, Üllői út 201. 7621 Pécs, Rákóczi út 1. 5661 Újkígyós, Kossuth Lajos utca 38. 1094 Budapest, Ferenc krt. 13. 7632 Pécs, Diána tér 14. 5530 Vésztő, Kossuth Lajos utca 72. 1085 Budapest, Kálvin tér 12-13. 7633 Pécs, Ybl Miklós utca 7/3. 5525 Füzesgyarmat, Szabadság tér 1. 1097 Budapest, Könyves Kálmán krt. 12-14. 7300 Komló, Kossuth Lajos utca 95/1. 5600 Békéscsaba, Andrássy út 37-43. 1095 Budapest, Soroksári út 32-34. 7700 Mohács, Széchenyi tér 1 3530 Miskolc, Uitz B. utca 6. 1102 Budapest, Kőrösi Csoma sétány 6. 7800 Siklós, Felszabadulás utca 60-62. 3530 Miskolc, Rákóczi út 1. 1103 Budapest, Sibrik Miklós utca 30. 7900 Szigetvár, Vár utca 4. 3531 Miskolc, Győri kapu 51. 1106 Budapest, Örs vezér tere 25 7720 Pécsvárad, Bem utca 2/b 3535 Miskolc, Árpád út 2. 1106 Budapest, Örs Vezér tere 25/A 1.em 7370 Sásd, Dózsa György utca 2. 3780 Edelény, Tóth Árpád út 1. 1115 Budapest, Bartók Béla út 92-94. 7960 Sellye, Köztársaság tér 4. 3860 Encs, Bem József utca 1. 1117 Budapest, Móricz Zsigmond körtér 18. 7940 Szentlőrinc, Munkácsy utca 16/A 3400 Mezőkövesd, Mátyás király utca 149. 1118 Budapest, Rétköz utca 5. 7773 Villány, Baross Gábor utca 36. 3580 Tiszaújváros, Szent István út 30. 1117 Budapest, Hunyadi János út 19. 7754 Bóly, Hősök tere 8/b 3600 Ózd, Városház tér 1/a. 1117 Budapest, Október huszonharmadika utca 8-10. 6000 Kecskemét, Korona utca 2. 3980 Sátoraljaújhely, Széchenyi tér 13. 1126 Budapest, Böszörményi út 9-11. 6000 Kecskemét, Szabadság tér 5. 3900 Szerencs, Kossuth tér 3/a. 1123 Budapest, Alkotás utca 53 6500 Baja, Deák Ferenc utca 1. 3700 Kazincbarcika, Egressy Béni út 50. 1124 Budapest, Apor Vilmos tér 11. 6300 Kalocsa, Szent István király út 43-45. 3950 Sárospatak, Eötvös József utca 2. 1055 Budapest, Nyugati tér 9. 6200 Kiskőrös, Petőfi tér 13. 3630 Putnok, Kossuth Lajos út 45. 1137 Budapest, Pozsonyi út 38. 6400 Kiskunhalas, Sétáló utca 7 3800 Szikszó, Kassai utca 16. 1062 Budapest, Váci út 1-3. 6100 Kiskunfélegyháza, Petőfi tér 1 3770 Sajószentpéter, Bethlen Gábor utca 1/a. 1138 Budapest, Váci út 135-139 6430 Bácsalmás, Szt János utca 32. 3450 Mezőcsát, Hősök tere 23. 1133 Budapest, Váci út 80. 6087 Dunavecse, Fő út 40. 3910 Tokaj, Rákóczi út 37. 1134 Budapest, Váci út 17. 6070 Izsák, Szabadság tér 1. 3527 Miskolc, József Attila utca 87. 1135 Budapest, Lehel út 70-76. 6440 Jánoshalma, Rákóczi utca 10. 6720 Szeged, Takaréktár utca 7. 1148 Budapest, Nagy Lajos király útja 19-21. 6237 Kecel, Császártöltési utca 1. 6720 Szeged, Aradi vértanúk tere 3. 1149 Budapest, Fogarasi út 15/b. 6120 Kiskunmajsa, Csendes köz 1. 6791 Szeged, Negyvennyolcas utca 3. 1149 Budapest, Bosnyák tér 17. 6090 Kunszentmiklós, Kálvin tér 11. 6600 Szentes, Kossuth Lajos utca 26. 1146 Budapest, Thököly út 102/b. 6050 Lajosmizse, Dózsa György utca 102/a. 6640 Csongrád, Szentháromság tér 2-6. 1152 Budapest, Szentmihályi út 131. 6449 Mélykút, Petőfi tér 18. 6800 Hódmezővásárhely, Andrássy út 1. 1151 Budapest, Fő utca 64. 6230 Soltvadkert, Szentháromság utca 2. 6900 Makó, Széchenyi tér 14-16. 1157 Budapest, Zsókavár utca 28. 6060 Tiszakécske, Béke tér 6. 6760 Kistelek, Kossuth Lajos utca 6-8 1163 Budapest, Jókai Mór utca 3/b. 6000 Kecskemét, Dunaföldvári út 2. 6782 Mórahalom, Szegedi út 3. 1161 Budapest, Rákosi út 118. 6320 Solt, Kossuth Lajos utca 48-50. 6724 Szeged, Rókusi krt. 42-64. 1173 Budapest, Ferihegyi út 93. 6080 Szabadszállás, Dózsa György út 1. 6724 Szeged, Londoni krt. 3. 1173 Budapest, Pesti út 5-7. 5600 Békéscsaba, Szt István tér 3. 8000 Székesfehérvár, Ősz utca 13. 1181 Budapest, Üllői út 377. 5700 Gyula, Bodoky utca 9. 2060 Bicske, Bocskai köz 1. 1188 Budapest, Vasút utca 48. 5800 Mezőkovácsháza, Árpád utca 177. 2400 Dunaújváros, Dózsa György út 4/e. 1183 Budapest, Üllői út 440. 5900 Orosháza, Kossuth Lajos utca 20. 8060 Mór, Deák Ferenc utca 2. 1195 Budapest, Üllői út 285. 5540 Szarvas, Kossuth Lajos tér 1. 7000 Sárbogárd, Ady Endre út 172. 1195 Budapest, Vak Bottyán út 75 a-c 5520 Szeghalom, Tildy Zoltán utca 4-8. 2457 Adony, Petőfi Sándor utca 2. 1204 Budapest, Kossuth Lajos utca 44-46. 5630 Békés, Széchenyi tér 2. 8130 Enying, Kossuth Lajos utca 43. 1238 Budapest, Grassalkovich út 160. 5830 Battonya, Fő utca 86. 2483 Gárdony, Szabadság út 18. 1203 Budapest, Bíró Mihály utca 7. 5510 Dévaványa, Árpád utca 32. 8154 Polgárdi, Deák Ferenc utca 16. 1239 Budapest, Bevásárló utca 2. 5742 Elek, Gyulai út 5. 8000 Székesfehérvár, Fő utca 7. 1211 Budapest, Kossuth Lajos utca 86. 5500 Gyomaendrőd, Szabadság tér 7 8000 Székesfehérvár, Holland fasor 2. INTEGRATED ANNUAL REPORT 2022 12 OTP BANK BUSINESS REPORT 2022 (SEPARATE) 9022 Győr, Teleki László utca 51. 2800 Tatabánya, Bárdos László utca 2. 7500 Nagyatád, Korányi Sándor utca 6. 9011 Győr, Győr-Szentiván, Déryné út 77. 3100 Salgótarján, Rákóczi út 22. 8600 Siófok, Fő tér 10/a 9400 Sopron, Teleki Pál út 22./A 2660 Balassagyarmat, Rákóczi fejedelem utca 44. 7570 Barcs, Séta tér 5. 9300 Csorna, Soproni út 58. 3060 Pásztó, Fő utca 73/a. 8630 Balatonboglár, Dózsa György utca 1. 9200 Mosonmagyaróvár, Fő utca 24 2651 Rétság, Rákóczi Ferenc utca 28-30. 8840 Csurgó, Petőfi tér 20. 9400 Sopron, Várkerület 96. fszt. 1. 3070 Bátonyterenye, Bányász utca 1/a. 8640 Fonyód, Ady Endre utca 25. 9330 Kapuvár, Szt István király utca 4-6. 3170 Szécsény, Feszty Árpád utca 1. 8693 Lengyeltóti, Csalogány utca 2. 9431 Fertőd, Fő utca 7. 2700 Cegléd, Szabadság tér 6. 8660 Tab, Kossuth Lajos utca 96. 9317 Szany, Ady Endre utca 2. 2370 Dabas, Bartók Béla út 46. 7561 Nagybajom, Fő út 107. 9024 Győr, Bartók Béla út 53/b. 2100 Gödöllő, Szabadság tér 12-13. 8638 Balatonlelle, Rákóczi út 202-204. 9024 Győr, Kormos István utca 6. 2200 Monor, Kossuth Lajos utca 88/b 4400 Nyíregyháza, Rákóczi utca 1. 9026 Győr, Egyetem tér 1. 2760 Nagykáta, Bajcsy-Zsilinszky utca 1. 4900 Fehérgyarmat, Móricz Zsigmond utca 4. 9027 Győr, Budai út 1. 2300 Ráckeve, Szt István tér 3. 4600 Kisvárda, Szt László utca 30. 4025 Debrecen, Pásti utca 1-3. 2000 Szentendre, Pannónia út 1-3. 4700 Mátészalka, Szalkay László utca 34. 4025 Debrecen, Piac utca 45-47. 2600 Vác, Széchenyi utca 3-7. 4300 Nyírbátor, Zrínyi utca 1. 4032 Debrecen, Füredi út 43. 2120 Dunakeszi, Barátság utca 29. 4800 Vásárosnamény, Szabadság tér 33. 4100 Berettyóújfalu, Oláh Zsigmond utca 1. 2030 Érd, Budai út 24. 4561 Baktalórántháza, Köztársaság tér 4. 4150 Püspökladány, Kossuth utca 2. 2750 Nagykőrös, Szabadság tér 2. 4233 Balkány, Szakolyi utca 5. 4220 Hajdúböszörmény, Kossuth Lajos utca 3. 2440 Százhalombatta, Szent István tér 8. 4765 Csenger, Ady Endre utca 1. 4080 Hajdúnánás, Köztársaság tér 17-18/a. 2740 Abony, Kossuth Lajos tér 3. 4492 Dombrád, Szabadság tér 7. 4200 Hajdúszoboszló, Szilfákalja utca 6-8. 2730 Albertirsa, Vasút utca 4/a. 4501 Kemecse, Móricz Zsigmond utca 18. 4060 Balmazújváros, Veres Péter utca 3. 2170 Aszód, Kossuth Lajos utca 42-46. 4320 Nagykálló, Árpád utca 10. 4110 Biharkeresztes, Kossuth utca 4. 2040 Budaörs, Szabadság utca 131/a. 4450 Tiszalök, Kossuth Lajos utca 52/a. 4130 Derecske, Köztársaság utca 111. 2330 Dunaharaszti, Dózsa György utca 25. 4440 Tiszavasvári, Kossuth Lajos utca 6. 4087 Hajdúdorog, Petőfi tér 9-11. 2230 Gyömrő, Szent István út 17. 4244 Újfehértó, Fő tér 15. 4138 Komádi, Fő utca 1-3. 2340 Kiskunlacháza, Dózsa György utca 219. 4625 Záhony, Ady Endre út 27-29. 4181 Nádudvar, Fő utca 119. 2364 Ócsa, Szabadság tér 1. 5000 Szolnok, Szapáry utca 31. 4090 Polgár, Barankovics tér 15. 2721 Pilis, Rákóczi utca 9. 5000 Szolnok, Nagy Imre krt. 2/a. 4242 Hajdúhadház, Kossuth utca 2. 2085 Pilisvörösvár, Fő utca 60 5100 Jászberény, Lehel vezér tér 28. 4032 Debrecen, Egyetem tér 1. 2310 Szigetszentmiklós, Ifjúság útja 17. 5440 Kunszentmárton, Kossuth Lajos utca 2. 4254 Nyíradony, Árpád tér 6. 2220 Vecsés, Fő utca 170. 5350 Tiszafüred, Piac tér 3. 4025 Debrecen, Hatvan utca 2-4. 2360 Gyál, Kőrösi út 160. 5200 Törökszentmiklós, Kossuth Lajos út 141. 3300 Eger, Törvényház utca 4. 2143 Kistarcsa, Hunyadi utca 7. 5300 Karcag, Kossuth Lajos tér 15. 3390 Füzesabony, Rákóczi utca 77. 2119 Pécel, Kossuth tér 4. 5310 Kisújszállás, Szabadság tér 6. 3200 Gyöngyös, Fő tér 1. 2092 Budakeszi, Fő utca 174. 5400 Mezőtúr, Szabadság tér 29. 3360 Heves, Hősök tere 4. 2040 Budaörs, Sport út 2-4. 5420 Túrkeve, Széchenyi utca 32-34. 3000 Hatvan, Kossuth tér 8. fszt. 1. 2120 Dunakeszi, Nádas utca 6. 5130 Jászapáti, Kossuth Lajos út 2-8. 3021 Lőrinci, Szabadság tér 25/A 2310 Szigetszentmiklós, Háros utca 120. 5123 Jászárokszállás, Rákóczi Ferenc utca 4-6. 3245 Recsk, Kossuth Lajos út 93. 2141 Csömör, Határ út 6. 5055 Jászladány, Kossuth Lajos utca 77. 3300 Eger, Széchenyi utca 2. 2013 Pomáz, József Attila utca 17. 5340 Kunhegyes, Szabadság tér 4. 2800 Tatabánya, Fő tér 32. 2083 Solymár, Szent Flórián utca 2. 5321 Kunmadaras, Kossuth tér 3. 2510 Dorog, Bécsi út 33. 2220 Vecsés, Fő utca 246-248 5430 Tiszaföldvár, Kossuth Lajos út 191. 2900 Komárom, Mártirok útja 23. 2112 Veresegyház, Fő út 52 5000 Szolnok, Széchenyi krt. 135. 2890 Tata, Ady Endre utca 1-3. 2234 Maglód, Esterházy utca 1. 7100 Szekszárd, Szent István tér 5-7. 2500 Esztergom, Rákóczi tér 2-4. 2030 Érd, Iparos út 5. 7030 Paks, Dózsa György utca 33. 2840 Oroszlány, Rákóczi utca 84. 2225 Üllő, Pesti út 92/b 7090 Tamási, Szabadság utca 33 2941 Ács, Gyár utca 14. 7400 Kaposvár, Széchenyi tér 2. 7150 Bonyhád, Szabadság tér 10. 2870 Kisbér, Batthyány tér 5. 7400 Kaposvár, Honvéd utca 55. 7200 Dombóvár, Dombó Pál utca 3. 2536 Nyergesújfalu, Kossuth Lajos utca 126. 8700 Marcali, Rákóczi utca 6-10. 7020 Dunaföldvár, Béke tér 11. INTEGRATED ANNUAL REPORT 2022 13 OTP BANK BUSINESS REPORT 2022 (SEPARATE) 7081 Simontornya, Petőfi utca 68. 9800 Vasvár, Alkotmány utca 2. 8330 Sümeg, Kisfaludy Sándor tér 1. 7130 Tolna, Kossuth Lajos utca 31. 9737 Bük, Kossuth Lajos utca 1-3. 8420 Zirc, Rákóczi tér 15. 7030 Paks, Kishegyi út 44/a 9700 Szombathely, Király utca 10. 8900 Zalaegerszeg, Kisfaludy utca 15-17. 7140 Bátaszék, Budai út 13. 8200 Veszprém, Brusznyai Árpád utca 1. 8800 Nagykanizsa, Deák tér 15. 9700 Szombathely, Fő tér 3-5. 8400 Ajka, Szabadság tér 18. 8960 Lenti, Dózsa György utca 1. 9700 Szombathely, Rohonci út 52. 8500 Pápa, Fő tér 22. 8360 Keszthely, Kossuth Lajos utca 38. 9900 Körmend, Vida József utca 12. 8300 Tapolca, Fő tér 2. 8868 Letenye, Szabadság tér 8. 9600 Sárvár, Batthyány utca 2. 8230 Balatonfüred, Petőfi Sándor utca 8. 8790 Zalaszentgrót, Batthyány utca 11. 9500 Celldömölk, Kossuth Lajos utca 18. 8100 Várpalota, Újlaky út 2. 8380 Hévíz, Erzsébet királyné utca 11. 9730 Kőszeg, Kossuth Lajos utca 8. 8220 Balatonalmádi, Baross Gábor utca 5/a. 9970 Szentgotthárd, Mártírok út 2. 8460 Devecser, Kossuth Lajos utca 13. INTEGRATED ANNUAL REPORT 2022 14 OTP BANK BUSINESS REPORT 2022 (SEPARATE) STATEMENT ON CORPORATE GOVERNANCE PRACTICE Corporate governance practice OTP Bank Plc., being registered in Hungary, has a corporate governance policy that complies with the provisions on companies of the act applicable (Civil Code). As the company conducts banking operations, it also adheres to the statutory regulations pertaining to credit institutions. Beyond fulfilling the statutory requirements, as a listed company on the Budapest Stock Exchange (BSE), the company also makes an annual declaration on its compliance with the BSE’s Corporate Governance Recommendations. After being approved by the General Meeting, this declaration is published on the websites of both the Stock Exchange (www.bet.hu) and the Bank (www.otpbank.hu). System of internal controls OTP Bank Plc., as a provider of financial and investment services, operates a closely regulated and state- supervised system of internal controls. OTP Bank Plc. has detailed risk management regulations applicable to all types of risks (credit, country, counterparty, market, liquidity, operational, compliance), which are in compliance with the regulations on prudent banking operations. Its risk management system extends to cover the identification of risks, the assessment and analysis of their impact, elaboration of the required action plans and the monitoring of their effectiveness and results. The business continuity framework is intended to provide for the continuity of services. Developed on the basis of international methodologies, the lifecycle model includes process evaluation, action plan development for critical processes, the regular review and testing of these, as well as related DRP activities. OTP Bank Plc.'s internal audit system is realised on several levels of control built on each other. The system of internal checks and balances includes process-integrated control, management control, independent internal audit organisation and executive information system. The independent internal audit organisation as a key element of internal lines of defence promotes the statutory and efficient management of assets and liabilities, the defence of property, the safe course of business, the efficient operation of internal control systems, the minimisation of risks, moreover it reveals and reports deviations from statutory regulations and internal rules, makes proposal to abolish deficiencies and follows up the execution of actions. The independent internal audit organisation annually and quarterly prepares group-level reports on control actions and audit results for the executive boards. Once a year, the internal audit organisation with the prior opinion of the Audit Committee draws up, for the Supervisory Board, the Board of Directors and the Risk Assumption and Risk Management Committee, objective and independent reports in respect of the operation of risk management, internal control mechanisms and corporate governance functions. Furthermore, in line with the provisions of the Credit Institutions Act, reports, once a year, to the Supervisory Board and the Board of Directors on the regularity of internal audit tasks, professional requirements and the conduct of audits, and on the review of compliance with IT and other technical conditions needed for the audits. In line with the regulations of the European Union, the applicable Hungarian laws and supervisory recommendations, OTP Bank Plc. operates an independent organisational unit with the task of identifying and managing compliance risks. The Compliance Directorate prepares a report quarterly to the Board of Directors, and annually to the Supervisory Board, about the Bank’s and the Bank Group’s compliance activities and position. IT Controls Applications are developed by either in-house group resources or by third parties. OTP Bank applies administrative, logical and physical control measures commensurate with the risk in order to protect the IT systems storing and processing data, as follows: • access to data/systems is only possible on the basis of a predefined authorisation management process that applies the principle of least privilege, ensures segregation of responsibilities, that has regular access right reviews and ensures that dismissed employees’ access is revoked in a timely manner; • user authentication, authorisation and password management processes are controlled by policies and • audited; the systems have well-separated test and development environments along with a secure change management procedure, which ensures that program developments or modifications can only be deployed to the operational environment after proper, controlled testing and approval; • systems are protected by appropriate network perimeter protection, various security devices and network segmentation, furthermore all network communications are protected with state-of-the-art encryption; INTEGRATED ANNUAL REPORT 2022 15 OTP BANK BUSINESS REPORT 2022 (SEPARATE) • the IT systems that store and process data are regularly backed up and backup media is stored in controlled premises with adequate protection for long-term retention, and the organisation carries out regular backup restore tests; • adequate redundancy is applied for IT systems that store and process data to ensure business continuity and disaster resiliency; • has developed DRPs and BCPs for critical systems and critical business processes, which is regularly • • • • • • • • tested and reviewed; the Bank collects and retains the complete log of all major IT operations and IT security relevant data processing activities and the confidentiality, availability, integrity, authenticity and non-repudiation of these audit logs are ensured; there is a continuous, up-to-date protection against malicious codes; it ensures the regular implementation of vendor patches and updates for the environments used; it uses a data leakage protection (DLP) solution to reduce the risk of inadvertent data loss; it ensures the continuous monitoring of the operation events of the physical and virtual environment system elements with automated event detection and management tools; the above measures are documented at an appropriate level, which ensures the traceability of the implementation of data security requirements in a transparent manner; it ensures permanent secure deletion of the data stored on the media, the destruction of the media and the documentation of the destruction of the media during secure operational media disposal processes; it enforces data protection requirements already at the design stage of the implementation of the IT systems storing and processing personal data and of the systems operational processes related to them; • acquire and maintain ability to adequately handle application related security events, including prevention, • detection, identification, isolation, analysis, recovery and reporting; remote work is regulated in a controlled and documented way, remote accesses are protected with multi- factor authentication; revision and update of IT security regulations with required frequencies; • ensures IT security compliance within operated regulative framework; • • ensures vulnerability assessments and penetration tests are carried out as planned; • define pools for categorization of installed software into preferred, allowed and prohibited. Ensure policy • is followed. it ensures that its employees have adequate knowledge of data protection requirements and provides regular data protection and information security awareness training for them. General Meeting The General Meeting is the supreme governing body of OTP Bank Plc. The regulations pertaining to its operation are set forth in the Company’s Articles of Association, and comply fully with both general and special statutory requirements. Information on the General Meeting is available in the Corporate Governance Report. The General Meeting was held on 13 April 2022 in accordance with the general rules, traditionally, with the personal participation of the shareholders, subject to Section 3 (1) of the Government Decree 502/2020. (XI. 16.) on the re-introduction of deviation provisions pertaining to the operation of partnerships and corporations during the state of emergency, also in line with the Act I of 2021 on the prevention of the coronavirus pandemic. Regulations and information to be presented in the Business Report concerning securities conferring voting rights issued by the Company and senior officials, according to the effective Articles of Association, and ownership structure The Company’s registered capital is HUF 28,000,001,000, that is twenty-eight thousand million one thousand Hungarian forint, divided into 280,000,010 that is Two hundred and eighty million and ten dematerialised ordinary shares with a nominal value of HUF 100 each, and a total nominal value of HUF 28,000,001,000, that is twenty eight billion one thousand Hungarian forint. The ordinary shares of the Company specified all have the same nominal value and bestow the same rights in respect of the Company. There are no restrictions in place concerning the transfer of issued securities constituting the registered capital of the Company. No securities with special control rights have been issued by the Company. INTEGRATED ANNUAL REPORT 2022 16 OTP BANK BUSINESS REPORT 2022 (SEPARATE) Special Employee Partial Ownership Plan Organization No. I. of OTP Employees and Special Employee Partial Ownership Plan Organization No. II. of OTP Employees (hereinafter referred to as: OTP SEPOPs) were established based on the decision of the Company’s certain employees and executives considered as employees pursuant to the Act XLIV of 1992 on Employee Partial Ownership Plan. Management rights of OTP SEPOPs are exercised by a trust named Alapítvány az OTP Munkavállalók Különleges Résztulajdonosi Programjáért, founded by the same employees setting up OTP SEPOPs. The Company did not participate either in foundation or in management of OTP SEPOPs. The Company in line with the ESOP Act initiated an employee share ownership plan having a remuneration purpose and founded OTP Bank ESOP Organization for its execution (hereinafter referred to as ESOP Organization). Pursuant to the laws, the management rights over the ESOP Organization are exercised by a law firm, the so called trustee. In the case of the ESOP Organization Szűcs Law Firm is entitled to exercise the authorities of the trustee. The Company participated in the foundation of the ESOP Organization, however, after its foundation it cannot participate in its management, and according to the laws, it is not entitled to either give orders or to recall the trustee. Rules on the restrictions of the voting rights: The Company’s ordinary shares confer one vote per share. An individual shareholder or group of shareholders may not exercise voting rights in respect of in an extent exceeding 25%, or – if the voting rights of another shareholder or group of shareholders exceed 10% – exceeding 33% of the total voting rights represented by the shares conferring voting rights at the Company’s General Meeting. The shareholder is obliged to notify the Company’s Board of Directors without delay if the shareholder directly or indirectly, or together with other shareholders in the same group of shareholders, holds more than 2% of the voting rights represented by the shares conferring voting rights at the Company’s General Meeting. Concurrently with this, the shareholder is obliged to designate the shareholders through which the indirect voting right exists, or the members of the group of shareholders. In the event of a failure to provide such notification, or if there are substantive grounds for assuming that the shareholder has made a misleading declaration regarding the composition of the shareholder group, then the shareholder’s voting right shall be suspended and may not be exercised until the shareholder has met the above obligations. The notification obligation stipulated in this paragraph and the related legal consequences are also incumbent upon individuals who are classified or may be classified as the Company’s shareholders under Article 61 of the Capital Markets Act. The Company must also be provided with proof of the conditions for exemption from the notification obligation in accordance with Section 61 (7)-(8) and Section 61 (10)-(11)-(12), of the Capital Markets Act. Shareholder group: the shareholder and another shareholder, in which the former has either a direct or indirect shareholding or has an influence without a shareholding (collectively: a direct and/ or indirect influence); furthermore: the shareholder and another shareholder who is exercising or is willing to exercise its voting rights together with the former shareholder, regardless of what type of agreement between the participants underlies such concerted exercising of rights. For determining the existence and extent of the indirect holding, the rules of the Credit Institutions Act relating to the calculation of indirect ownership shall be applied. If the voting rights that may be exercised by a shareholder group exceed the threshold stipulated in the first paragraph of this section, the voting rights shall be reduced in such a way that the voting rights relating to the shares most recently acquired by the group of shareholders shall not be exercisable. If there are substantive grounds to presume that the exercising of voting rights by any shareholder or shareholders might result in a breach of the rules of the Capital Markets Act relating to the acquisition of a controlling interest, the Board of Directors’ authorised representative responsible for the registration of shareholders at the venue of the General Meeting, or the Chairman of the General Meeting, may exclude the affected shareholders from attending the General Meeting or exercising voting rights. The General Meeting has exclusive authority with respect to the decision regarding the delisting of the shares (qualified majority). When making the decisions, shares embodying multiple voting rights shall represent one share. The Company is not aware of any kind of agreements among the owners that could give rise to the restriction of the transfer of issued securities and/or the voting rights. INTEGRATED ANNUAL REPORT 2022 17 OTP BANK BUSINESS REPORT 2022 (SEPARATE) Rules on the appointment and removal of executive officers, and rules on amendment of the Articles of Association: The Board of Directors has at least 5, and up to 11 members. When making the decisions, shares embodying multiple voting rights shall represent one share. The members of the Board of Directors are elected by the General Meeting based on its decision uniformly either for an indefinite period or for five years; in the latter case the mandate ends with the General Meeting concluding the fifth financial year following the election. The mandate of a member elected during this period expires together with the mandate of the Board of Directors. The Board of Directors elects a Chairman and, may elect one or more Deputy Chairmen, from among its own members, whose period of office shall be equal to the mandate of the Board of Directors. The Chairman of the Board of Directors is also the Chief Executive Officer (Chairman & CEO) of the Company, unless the Board of Directors decides within its competence that the position of Chairman of the Board of Directors and the Chief Executive Officer of the Company are held by separate persons. The membership of the Board of Directors ceases to exist by a. expiry of the mandate, b. resignation, recall, c. d. death, e. f. the occurrence of grounds for disqualification as regulated by law. termination of the employment of internal (executive) Board members. The General Meeting has exclusive authority with respect to the following matters: • the recall of members of the Board of Directors, the Supervisory Board and Audit Committee, and of the auditor; (qualified majority) More than one third of the members of the Board of Directors and the non-executive members of the Supervisory Board may be recalled within a 12-month period only if any shareholder holds more than 33% of the shares issued by the Company, which have been obtained by the shareholder by way of a public purchase offer. • except in the cases referred by these Articles of Association to the authority of the Board of Directors, the establishment and amendment of the Articles of Association; (qualified majority); the General Meeting decides on proposals concerning the amendment of the Articles of Association – based on a resolution passed by shareholders with a simple majority – either individually or en masse. The Board of Directors is obliged to • prepare the Company’s financial statements in accordance with the Accounting Act, and make a proposal for the use of the profit after taxation; • prepare a report once a year for the General Meeting, and once every three months for the Supervisory Board, concerning management, the status of the Company’s assets and business policy; • provide for the proper keeping of the Company's business books; • perform the tasks referred to its authority under the Credit Institutions Act, in particular: - ensuring the integrity of the accounting and financial reporting system; - elaborating the appropriate strategy and determining risk tolerance levels for each business unit concerned; - setting risk assumption limits; - providing the necessary resources for the management or risk, the valuation of assets, the use of external credit ratings and the application of internal models. The following, in particular, come under the exclusive authority of the Board of Directors: • election of the Chairman & Chief Executive Officer of the Company, and exercising employer’s right in respect thereof; • election of one or more Deputy Chairmen of the Board of Directors; • determination of the annual plan; • the analysis and assessment of the implementation of business-policy guidelines, on the basis of the Company’s quarterly balance sheet; • decisions on transactions referred to the authority of the Board of Directors by the Company's organisational and operational regulations; • decision on launching, suspending, or terminating the performance of certain banking activities within the scope of the licensed activities of the Company; INTEGRATED ANNUAL REPORT 2022 18 OTP BANK BUSINESS REPORT 2022 (SEPARATE) • designation of the employees entitled to sign on behalf of the Company; • decision on the increasing of registered capital at the terms set out in the relevant resolution of the General Meeting; • decision to acquire treasury shares at the terms set out in the relevant resolution of the General Meeting; • decision on approving internal loans in accordance with the Credit Institutions Act; • decision on the approval of regulations that fundamentally determine banking operations, or are referred to its authority by the Credit Institutions Act. The following shall qualify as such regulations: - - - - - - - the collateral evaluation regulations, the risk-assumption regulations, the customer rating regulations, the counterparty rating regulations, the investment regulations, the regulations on asset classification, impairment and provisioning, the organisational and operational regulations, which contain the regulations on the procedure for assessing requests related to large loans, the regulations on the transfer of signatory rights; - the decision on approving the Rules of Procedure of the Board of Directors; • • decision on steps to hinder a public takeover procedure; • decision on the acceptance of a public purchase offer received in respect of treasury shares; • decision on the commencement of trading in the shares in a regulated market (flotation); • decision on the cessation of trading in the shares in a given regulated market, provided that the shares are traded in another regulated market (hereinafter: transfer). The Board of Directors is exclusively authorised to: • decide, in the cases specified in the Civil Code, on acceptance of the Company’s interim balance sheet, subject to the prior approval of the Supervisory Board; • decide, instead of the General Meeting, to pay an advance on dividends, subject to the preliminary approval of the Supervisory Board; • make decisions regarding any change in the Company’s name, registered office, permanent establishments and branches, and in the Company’s activities – with the exception of its core activity – and, in relation to this, to modify the Articles of Association should it become necessary to do so on the basis of the Civil Code or the Articles of Association; • make decision on mergers (if, according to the provisions of the law on the transformation, merger and demerger of legal entities, the approval of the General Meeting is not required in order for the merger to take place). The Board of Directors directly exercises employer's rights in respect of the Chairman & CEO. The person affected by a decision may not participate in the decision making. Employer rights in respect of the executive directors of the Company are exercised by the Board of Directors through the Chairman & CEO, with the proviso that the Board of Directors must be notified in advance of the appointment and dismissal of the Deputy CEOs. With regard to issues related to the exercising of employer's rights in respect of employees, the Company is represented by the Chief Executive Officer and by the senior company employees defined in the Organisational and Operational Regulations of the Company, in accordance with the delegation of authority approved by the Board of Directors. If the Chairman of the Board of Directors and the CEO are different persons, the employer rights in respect of the other executive directors of the Company (CEO, deputy CEOs) are exercised by the Board of Directors through the Chairman of Board of Directors, with the proviso that the Board of Directors shall be notified in advance of the appointment and dismissal of the CEO and Deputy CEOs. With regard to issues related to the exercising of employer's rights in respect of employees, the Company is represented by the persons defined in the Organisational and Operational Regulations of the Company, in accordance with the delegation of authority approved by the Board of Directors. The Board of Directors may delegate, to individual members of the Board of Directors, to executive directors employed by the Company, and to the heads of the individual service departments, any task that does not come under the exclusive authority of the Board of Directors in accordance with these Articles of Associat ion or a General Meeting resolution. The Company may acquire treasury shares in accordance with the rules of the Civil Code. The prior authorisation of the General Meeting is not required for the acquisition of treasury shares if the acquisition of the shares is necessary in order to prevent a direct threat of severe damage to the Company (this INTEGRATED ANNUAL REPORT 2022 19 OTP BANK BUSINESS REPORT 2022 (SEPARATE) provision is not applicable in the event of a public purchase offer aimed at buying up the Company’s shares), as well as if the Company acquires the treasury shares in the context of a judicial procedure aimed at the settlement of a claim to which the Company is entitled, or in the course of a transformation. The Company has not made agreements in the meaning of points (j) and (k) in paragraph 95/A of Act No. C of 2000 on Accounting. Ownership structure of OTP Bank Plc. Description of owner Domestic institution/company Foreign institution/company Domestic individual Foreign individual Employees, senior officers2 Treasury shares3 Government held owner International Development Institutions Other4 TOTAL 1 January 2022 31 December 2022 Total equity Ownership share Voting rights1 26.66% 66.69% 4.79% 0.11% 0.48% 1.16% 0.07% 0.04% 0.00% 100.00% 26.97% 67.47% 4.84% 0.12% 0.48% 0.00% 0.07% 0.04% 0.00% 100.00% Quantity 74,637,180 186,733,858 13,405,389 319,712 1,341,018 3,251,484 188,326 120,871 2,172 280,000,010 Ownership share Voting rights 1 31.80% 50.05% 16.91% 0.52% 0.55% 0.13% 0.05% 0.00% 0.00% 100.00% 31.84% 50.11% 16.93% 0.52% 0.55% 0.00% 0.05% 0.00% 0.00% 100.00% Quantity 89,040,716 140,129,576 47,338,305 1,464,494 1,526,762 354,144 139,946 3,183 2,884 280,000,010 1 Voting rights in the General Meeting of the Issuer for participation in decision-making. 2 The shares indirectly owned by György Nagy, a member of the Board of Directors, were reclassified to the domestic individual category as of 31 December 2021. 3 Treasury shares do not include the OTP shares held by ESOP (OTP Bank Employee Stock Ownership Plan Organization). Pursuant to Act V of 2013 on the Civil Code, OTP shares held by the ESOP are not classified as treasury shares, but the ESOP must be consolidated in accordance with IFRS 10 Consolidated Financial Statements standard. On 31 December 2022 ESOP owned 10,965,752 OTP shares. 4 Non-identified shareholders according to the shareholders’ registry. Number of treasury shares held in the year under review (2022) OTP Bank Subsidiaries TOTAL 1 January 3,251,484 0 3,251,484 31 March 691,233 0 691,233 30 June 467,880 0 467,880 30 September 365,842 0 365,842 31 December 354,144 0 354,144 Shareholders with over/around 5% stake as at 31 December 2022 Name Nationality1 Activity2 MOL (Hungarian Oil and Gas Company Plc.) Groupama Group Groupama Gan Vie SA Groupama Biztosító Ltd. D F/D F D C C C C Number of shares 24,000,000 14,258,161 14,140,000 118,161 Ownership3 8.57% 5.09% 5.05% 0.04% Voting rights3,4 8.58% 5.10% 5.06% 0.04% Notes5 1 Domestic (D), Foreign (F). 2 Custodian (CU), Public Institution (PU), International Development Institutions (ID), Institutional (I), Company (C), Private (PR), Employee or senior officer (E). 3 Rounded to two decimals. 4 Voting rights in the General Meeting of the Issuer for participation in decision-making. 5 Eg: professional investor, financial investor, etc. INTEGRATED ANNUAL REPORT 2022 20 OTP BANK BUSINESS REPORT 2022 (SEPARATE) Senior officers, strategic employees and their shareholding of OTP shares as at 31 December 2022 Type1 Name Position IT IT IT IT IT IT IT IT IT IT IT FB FB FB FB FB FB SP SP dr. Sándor Csányi 2 Chairman and CEO Deputy Chairman Tamás Erdei member Gabriella Balogh member Mihály Baumstark member, Deputy CEO Péter Csányi member dr. István Gresa Antal Kovács3 member, Deputy CEO György Nagy4 member dr. Márton Gellért Vági member member dr. József Vörös member, Deputy CEO László Wolf Chairman Tibor Tolnay Deputy Chairman dr. Gábor Horváth member Klára Bella member dr. Tamás Gudra member András Michnai member Olivier Péqueux Deputy CEO László Bencsik Deputy CEO György Kiss-Haypál TOTAL No. of shares held by management: Commencement date of the term 15/05/1992 27/04/2012 16/04/2021 29/04/1999 16/04/2021 27/04/2012 15/04/2016 16/04/2021 16/04/2021 15/05/1992 15/04/2016 15/05/1992 19/05/1995 12/04/2019 16/04/2021 25/04/2008 13/04/2018 Expiration/termination of the term 2026 2026 2026 2026 2026 2026 2026 2026 2026 2026 2026 2023 2023 2023 2023 2023 2023 Number of shares 325.047 43.085 8.193 53.600 9.648 182.858 114.759 34.800 8.500 186.714 535.347 54 0 408 0 100 0 12.744 10.905 1,526,762 1 Employee in strategic position (SP), Board Member (IT), Supervisory Board Member (FB) 2 Number of OTP shares owned by Dr. Sándor Csányi, Chairman and CEO, directly or indirectly: 4,602,174 3 Number of OTP shares owned by Antal Kovács, Member of Board of Directors, directly or indirectly: 119,059 4 Number of OTP shares owned by György Nagy, Member of Board of Directors, directly or indirectly: 1,118,955 Committees1 Members of the Board of Directors Dr. Sándor Csányi – Chairman Mr. Tamás Erdei – Deputy Chairman Ms. Gabriella Balogh Mr. Mihály Baumstark Mr. Péter Csányi Dr. István Gresa Mr. Antal Kovács Mr. György Nagy Dr. Márton Gellért Vági Dr. József Vörös Mr. László Wolf Members of the Supervisory Board Mr. Tibor Tolnay – Chairman Dr. József Gábor Horváth – Deputy Chairman Ms. Klára Bella Dr. Tamás Gudra Mr. András Michnai Mr. Olivier Péqueux Members of the Audit Committee Dr. József Gábor Horváth – Chairman Mr. Tibor Tolnay – Deputy Chairman Dr. Tamás Gudra Mr. Olivier Péqueux The résumés of the committee and board members are available in the Corporate Governance Report/Annual Report. 1 Personal changes can be found in the „Personal and organizational changes” chapter. INTEGRATED ANNUAL REPORT 2022 21 OTP BANK BUSINESS REPORT 2022 (SEPARATE) Personal and organizational changes On 13 April 2022, concerning the audit of OTP Bank Plc.’s separate and consolidated annual financial statements in accordance with International Financial Reporting Standards for the year 2022, the Annual General Meeting elected Ernst & Young Ltd. as the Company’s auditor from 1 May 2022 until 30 April 2023. From 1 January 2023 Antal Kovács' position was taken over by András Becsei as the Retail Division Deputay CEO. Antal Kovács will retain his employment status, thus his position as Deputy CEO until the Annual General Meeting closing the financial year 2022, during which time he will mainly be responsible for group governance. Operation of the executive boards OTP Bank Plc. has a dual governance structure, in which the Board of Directors is the Company’s executive management body in its managerial function, while the Supervisory Board is the management body in its supervisory function of the Company. It controls the supervision of the lawfulness of the Company’s operation, its business practices and management, performs oversight tasks and accepts the provisions of the Bank Group's Remuneration Policy. The effective operation of Supervisory Board is supported by the Audit Committee, as a committee, which also monitors the internal audit, the risk management, the reporting systems and the activities of the auditor. In order to assist the performance of the governance functions the Board of Directors founded and operates, as permanent or other committees, such as the Management Committee, the Remuneration Committee, the Nomination Committee and the Risk Assumption and Risk Management Committee. To ensure effective operation OTP Bank Plc. also has a number of further permanent committees. OTP Bank Plc. gives an account of the activities of the executive boards and the committees every year in its Corporate Governance Report. The Board of Directors held 6, the Supervisory Board held 7 meetings, while the Audit Committee held 2 meetings in 2022. In addition, resolutions were passed by the Board of Directors on 139, by the Supervisory Board on 73 and by the Audit Committee on 24 occasions by written vote. Policy of diversity OTP Bank Plc. determines and regulates the criteria for the selection of senior executives in line with European Union as well as domestic legal requirements and directives fundamentally determining the operation of credit institutions. When designating members of the management bodies (Board of Directors, Supervisory Board) as well as appointing members of the Board of Directors and administrative members (Management), OTP Bank Plc. considers the existence of professional preparation, the high-level human and leadership competence, the versatile educational background, the widespread business experience and business reputation of the utmost importance, at the same time, it is also highly committed to taking efficient measures in order to ensure diversity with regard to corporate operation, including the gradual improvement in women’s participation rate. OTP Bank Plc.’s Nomination Committee continuously keeps tracking the European Union and domestic legislation relating to women’s quota on its agenda, in that when unambiguously worded expectations are announced, it promptly takes the necessary measures. In accordance with OTP Bank Plc.’s currently approved strategy, the goal is to have at least one female member in both the Bord of Directors and the Supervisory Board. It is important to note, however, that, as a public limited company, the selection of the members of the management bodies falls within the exclusive competence of the General Meeting upon which – beyond its capacity to designate enforcing the above aspects to maximum effect – OTP Bank Plc. has no substantive influence. According to OTP Bank Plc.’s Articles of Association, a Board of Directors comprising 5-11 members and a Supervisory Board comprising 5-9 members are set up at OTP Bank Plc. Currently the Board of Directors operates with 11 members and has one female member, the Supervisory Board comprises 6 members and has one female member. The management of OTP Bank Plc. currently comprises 7 members and has no female member. INTEGRATED ANNUAL REPORT 2022 22 OTP BANK BUSINESS REPORT 2022 (SEPARATE) NON-FINANCIAL STATEMENT – OTP BANK PLC. (SEPARATE) ENVIRONMENTAL POLICY, ENVIRONMENTAL PROJECTS OTP Group is committed to the protection of the environment, the combating of climate change and its impacts, and the preservation and low-impact use of natural resources. OTP Bank’s environmental activities are regulated in its Environmental Regulation, which is revised annually. The Regulation ensures legal compliance and the consideration and integration of environmental criteria into the Bank’s business operations to minimise the environmental impacts of operating and maintaining the Bank’s organisation. It also sets out the rules on implementing the principles of sustainable procurement. OTP Group members operate in full compliance with environmental legislation and received no fines in 2022. In CDP’s Climate Change Questionnaire, OTP Group was rated at B- in 2022, thus retaining its previous rating. The environmental impacts of the OTP Group are related to the provision of financial services and directly from its operations. In connection with the provision of financial services, the management of environmental risks and the exploitation of environmental opportunities take place within the framework of the Environmental, Social and Governance (ESG) strategy; therefore, these activities are presented in the chapter Non-financial Report. Our efforts to reduce the direct environmental impact of OTP Group’s operations are centred around improving energy efficiency and reducing paper usage. The environmental risks associated with our operations are analysed and managed within our operational risk management process. Potential risks are identified during the annual process-based self-assessment, and the assessment of climate change risks is also included in the scenario analysis of risks with low probability but high impact. Energy consumption and business travel OTP Group uses state-of-the-art technology in new construction and renovation projects; we are also continually expanding our use of LED lighting technology. We are constantly seeking opportunities to increase energy efficiency, by analysing the energy efficiency and consumption characteristics of our buildings. As part of our renovation process, we are replacing air conditioning units, always ensuring that the new units use environmentally-friendly coolants. Whenever a branch of the parent bank is renovated, we always examine the possibility of installing solar panels and heat pumps. In 2022, we installed solar panels at two branches and a heat pump. Our systems generated a total of 2,034 GJ energy from solar power. We are committed to using green electricity. The solar system planned for the three DSK Bank buildings will be installed in early 2023. OTP Bank, Serbian and Croatian subsidiaries covered all their consumption with green electricity, while SKB Bank in Slovenia covered 50%. The trend in energy consumption during the year was significantly influenced by the fact that a significantly higher proportion of staff returned to work in offices as the restrictions imposed by Covid-19 were lifted. Again, face-to-face meetings, including business travel, became more frequent. This has led to an overall increase in car use across in OTP Group, while online meetings remain a dominant part of the relationship. The number of business trips and the size of the vehicle fleet are determined by the needs of the business. Our Group’s vehicle policy sets carbon limits; moreover, the choice of cars includes environmentally-friendly vehicles in all vehicle categories. OTP Bank's fleet will include 5 electric and 89 hybrid cars by the end of 2022. Volume of energy consumption, OTP Bank Total energy consumption (GJ) Per capita energy consumption (GJ) Energy consumption data are derived from readings; the measured consumption volumes are converted to energy using local average calorific values The projection of the per capita value is the average number of full-time employees (TMD). 2021 251.730 26,75 2021 267.883 26,07 INTEGRATED ANNUAL REPORT 2022 23 OTP BANK BUSINESS REPORT 2022 (SEPARATE) Efforts to reduce paper use We are constantly working to reduce paper use. At OTP Group, office paper use decreased again in 2022, while at OTP Bank it remained practically the same. OTP Group’s paper consumption OTP Bank OTP Group 2018 2019 2020 2021 2022 2018 2019 2020 2021 2022 Total quantity of paper used (t) 685 699 478 398 397 1,955 2,3501 1,795 1,751 1,551 Quantity of paper used for packaging, document filing and other purposes (t) of Quantity indirectly (t)2 paper used 43 58 75 90 98 116 117 153 8294 1,1054 5 7 5843 491 558 511 631 903 732 897 1 In 2019 our Russian subsidiary also added the paper used in POS sales, which it did not include in prior years. This represen ted 320 tons of paper. 2 E.g. marketing publications, account statements 3 Predominantly the consumption of the former Monicomp 4 The consumption of Nádudvari Élelmiszer Kft. amounts to 500 tons. Sustainable use and waste management We follow the principle of using all our equipment, devices and machines for the longest time reasonably possible. We explicitly aim to use furniture until the end of its lifecycle, reusing it multiple times and ensuring the compatibility of replacements. OTP Bank, DSK Bank, OTP Bank Romania and OTP banka Srbija all follow the practice of making charitable donations of any furniture no longer used but in good condition, as well as functioning IT equipment (mostly computers and laptops), to institutions and organisations in need. OTP Bank was the first bank in Hungary to issue a bank card made largely (85%) of recycled plastic. In 2022, OTP Bank continued to issue debit cards with a lower environmental impact. With the aim of reducing plastic waste, in addition to our previous practices, in 2022 Bulgaria, Romania and Slovenia started replacing plastic cups with paper for internal use. In order to reduce waste from the use of toners and ink cartridges, the Croatian, Serbian, Slovenian, Romanian, Montenegrin and Moldovan subsidiaries also use refilled toners. The selective collection and treatment of hazardous waste and paper containing business secrets is carried out at all members of the OTP Group in accordance with legal requirements. The selective collection of non- confidential paper waste, plastic and metal waste is carried out to varying degrees at the members of the Group. In Moldova, the selective collection of non-confidential paper waste started in 2022. At OTP Bank's headquarters, at the Croatian and Romanian subsidiaries, selective collection of non-confidential paper waste, PET bottles, packaging metal and glass is implemented. In the Serbian subsidiary bank, paper waste is also collected separately at the head office and in branches. SKB Bank collects municipal waste, including degradable food waste, as separately as possible. Our Albanian subsidiary bank collects paper waste separately in its entirety, and our Montenegrin subsidiary bank has implemented this practice for the head office and the archives. Separate collection is carried out at the headquarters of the Ukrainian subsidiary and at the Sofia and Varna sites of the Bulgarian subsidiary. Attitude shaping Most members of our Banking Group have a tradition of raising awareness and taking joint action to protect environmental and natural resources. In 2022, we supported several environmental initiatives and encouraged the environmentally conscious behaviour of our employees. OTP Bank continued the campaign with MastercCard in the Priceless Planet Coalition in 2022 that encourages consumers to protect the environment and actively contribute to this goal themselves. The Priceless Planet Coalition aims to preserve the environment through the restoration of 100 million trees over five years and to help mitigate the adverse effects of climate change. In 2022, OTP Bank has made it possible to plant 75,000 trees, 50 % more than in the previous year. DSK Bank also supported the One Tree Initiative, which aims to create an interactive map of Sofia’s tree stock. The tree survey was conducted by volunteers, registering a total of more than 12,000 trees. The bank also supported the initiative of the Hungarian Cultural Institute, within the framework of which bicycle storage INTEGRATED ANNUAL REPORT 2022 24 OTP BANK BUSINESS REPORT 2022 (SEPARATE) spaces will be installed in front of cultural institutions. The aim of the project was to ensure the environmentally friendly accessibility of cultural institutions. Our Croatian subsidiary supported Ekotlon, Croatia's largest plogging (garbage collection) race in 2022. More than 500 runners participated in the event. Registration fees were again used to support sports clubs for people with disabilities. We are also extending the scope of our employee involvement programmes: • To promote environmental awareness, we wrote about the reduction in paper use and disposable plastics in the OTP Bank’s online magazine. • During the year, the Serbian subsidiary bank commemorated all major international World Environment Day events on its social media channels. It published several messages in its internal newsletter on ways to reduce carbon emissions at work and at home. • The Slovenian subsidiary has implemented an extensive internal campaign on environmental awareness. The results of the campaign are already visible in the economical use of lighting and heating and are expected to be reflected in consumption in the future. Bank staff planted more than 1,000 honey plants in 2022, and a total of 72 kg of honey was produced in the beehives on the roof of the central office building. The Bank is also working to gather new innovative ideas by joining the Green Network and the Centre for Energy Efficient Solutions (CER) in Slovenia. • At Ukrainian subsidiary the “Batteries, inward” campaign was limited due to the war, in which used batteries are collected and delivered to a recycling plant in Romania. • Following its energy renovations, our Montenegrin subsidiary will also train its employees in the energy-conscious use of the systems. • Many internal communication activities of the Romanian subsidiary are brought together by the Green dot hashtag. Employees participated in volunteer activities, including supporting the Plastic Free Water Association, which works to stop pollution from entering the Danube via the River Zsil. As part of the cooperation, 22 Bank employees also participated in waste collection. Fight against corruption and against the practice of bribery discrimination The Code of Ethics and the Anti-Corruption Policy of OTP Bank contains provisions on the fight against corruption and against the practice of bribery, also on the acceptance of individual differences and the denial of https://www.otpbank.hu/static/portal/sw/file/OTP_EtikaiKodex_EN.pdf, (otpbank.hu)). As it can be read in the foreword of the Code and the Anti-Corruption Policy as well, the Bank and its management have adopted the principle of zero tolerance towards corruption and bribery, taking a definite stance against all forms of corruption and giving full support to the fight against corruption. In addition, the Code states that "As an ethical and compliant institution, the Bank and its management are fully committed to ensuring observance of all relevant legislation, including anti-corruption statutes." (https://www.otpbank.hu/portal/en/EthicalDeclaration Anti_Corruption_Policy.pdf The Bank has set up an ethics reporting system (whistleblowing), which is for the reporting and the handling of the reports on suspected or actual violation of the values set forth in the Code of Ethics, where anonymous reporting of ethics issues is also possible. The Bank conducts inquiries for the purpose of detecting, preventing anomalies in connection with reports made or anomalies it became aware of otherwise. Through the Bank's ethics reporting system a total of 152 reports were received in 2022. In 70 of these reports, we deemed it necessary to conduct an ethical procedure and 10 case’s investigation resulted in declaring ethics offense – though not due to corruption, bribery or discrimination. The Bank has created and maintains its Code of Ethics to keep reputational risk and financial losses, which may incur in relation to corruption, bribery and discrimination, on a minimum level. Both employees and newcomers receive education on the Code of Ethics, and in addition, the acceptance to be bound by it is a prerequisite for their employment. In addition, all business partners and clients are communicated about the Anti-Corruption Policy and procedures through the Code of Ethics and Anti-Corruption Policy published publicly on the Bank's website. The Anti-Corruption Policy stipulates that, in view of the fact that existing and established relationships with contractual partners also contain the possibility of corruption, the Bank will act prudently in its dealings with contractors, in particular in the tendering and preparation process, to minimise the risk of corruption. The Bank establishes relationships with its contractual partners based on an assessment of professionalism, competence and competitiveness, and does not apply other non-professional selection criteria that contain the possibility of corruption. Any requests from third parties affecting human rights are treated by the Bank as a priority. We manage the risks regarding the fight against corruption and bribery within the framework of our operational risk management process. Our quarterly compliance reports cover the changes in risks as well as the steps INTEGRATED ANNUAL REPORT 2022 25 OTP BANK BUSINESS REPORT 2022 (SEPARATE) necessary steps to manage them. The reports are presented to the Management Committee and the Board of Directors; the annual report is also submitted to the Supervisory Board. Short description of the business model of the company OTP Bank is the market leading credit institution in Hungary. As for its business model, the Bank offers high- quality financial services to retail, private banking, micro and small business, medium and large corporate, as well as municipality clients through both its branch network and its steadily developing digital channels. The Bank provides comprehensive banking and other financial services to both retail and corporate customers: its activities include deposit collection from customers and raising money from the money and capital markets; on the asset side, OTP Bank offers mortgage loans, consumer credits, working capital and investment loans to companies, as well as loans to municipalities, whereas its liquidity reserves are invested in money and capital market instruments. Moreover, the Bank provides a wide range of state-of-the-art services, including wealth management, investment services, payment services, treasury and other services. In addition, OTP Bank's Hungarian subsidiaries deliver a wide range of further financial services. At the end of 2022, OTP Bank and its Hungarian subsidiaries served more than 4.6 million clients in total. The Bank owns foreign subsidiaries in many countries of Central and Eastern Europe through capital investments. Non-financial performance indicators • Internal audit: 176 closed audits, 1,142 recommendations, 1,141 accepted recommendations. • Compliance with Budapest Stock Exchange (BSE) Recommendations (yes/no ratio): 72 yes, 0 no. • Compliance: 6 closed consumer protection related investigations. • Bank security investigations, reports: we filed a criminal complaint in connection with a total of 655 cases (728 in 2021), and in 8 cases we filed a report with the various authorities. • Official reports made on suspicion of money laundering: in the relevant period, we filed official reports on suspicion of money laundering in 315 cases. The total amount included in the reports: HUF 13.6 billion. Notifications: We made 3,476 notifications to NAV PEI in connection with money laundering. The total amount included in the notifications was HUF 1.1 billion. The expected damage value from the discovered crimes is more than HUF 1 billion, which is more than the requested amount of the realized loss last year, which was HUF 445 million (680 million HUF in 2020, 533 million HUF in 2019). The majority of the loss occurred in the area of financial abuse. Regarding the year 2022, according to our data, a loss of close to HUF 1.3 billion was prevented by thwarting attempts to defraud the bank. (It can be concluded that in the year 2022, the number of abuses committed on the electronic interface to the detriment of customers has increased almost ninefold, compared to last year. The perpetrators rely on the IT education deficiencies and inexperience of the customers. As a result, there is also an exceptional increase in customer losses, which was around HUF 3 billion.) In 2022, a total of 1,874 suspicious transactions with a total value of HUF 31.7 billion will be screened in the monitoring filter system used to filter international payment orders. Of these, 170 transfers HUF 5 billion in total were confiscated due to suspicion of money laundering, and 1,704 transfers HUF 26.7 billion in total due to suspicion of fraud. Compared to 2020 and 2021, an increase can be observed in connection with bank card abuse, both in terms of the number of attempted abuses and the damage. In 2022, the value of successful bank card abuses exceeded HUF 1.9 billion (HUF 820 million in 2021), of which the value of successful transactions with cards issued by OTP amounted to HUF 1.7 billion (HUF 667 million in 2021). As a result of the preventive security measures taken by the bank, the value of fraudulent bank card transactions that failed in 2022 is HUF 4,993.4 million. (2021 HUF 5,440.2 million, 2020 HUF 2,159.2 million). Of this, the value of abuses prevented in the case of cards issued by OTP is HUF 4,784.1 million (2021: HUF 5.2 billion). Despite the negative tendencies, in the case of OTP the ratio of bank card misuse to turnover remained lower than the European average published by MasterCard (last year's figures: OTP Bank 0.0108%, European average 0.0421%). • Ethics issues: 152 ethics reports, establishing ethics offense in 10 cases. INTEGRATED ANNUAL REPORT 2022 26 OTP BANK BUSINESS REPORT 2022 (SEPARATE) LIST OF NON-AUDIT SERVICES BY SERVICE CATEGORIES USED BY THE BANK The statutory audit of OTP Bank is carried out by Ernst and Young Ltd., in addition to which the following services were contracted: • Assurance engagements other than audits or reviews of historical financial information (ISAE 3000) • Engagements to review historical financial statements and interim financial statements (ISRE 2400, 2410); • Issue of Comfort letters; • Engagements to perform agreed-upon procedures regarding financial information (AUP according to ISRS 4400); • Consultation relating to interpretation and implementation of accounting standards and relating to accounting of potential future transaction. INTEGRATED ANNUAL REPORT 2022 27 BUSINESS REPORT 2022 (CONSOLIDATED) INTEGRATED ANNUAL REPORT 2022 28 OTP BANK BUSINESS REPORT 2022 (CONSOLIDATED) CONSOLIDATED FINANCIAL HIGHLIGHTS2 AND SHARE DATA Main components of the adjusted Statement of recognised income Consolidated profit after tax Adjustments (total) Consolidated adjusted profit after tax Profit before tax Operating profit Total income Net interest income Net fees and commissions Other net non-interest income Operating expenses Total risk costs Corporate taxes Main components of the adjusted balance sheet closing balances Total assets Total customer loans (net, FX adjusted) Total customer loans (gross, FX adjusted) Performing (Stage 1+2) customer loans (gross, FX-adjusted) Allowances for possible loan losses (FX adjusted) Total customer deposits (FX-adjusted) Issued securities Subordinated loans Total shareholders' equity Indicators based on adjusted earnings ROE (from profit after tax) ROE (from adjusted profit after tax) ROA (from adjusted profit after tax) Operating profit margin Total income margin Net interest margin Cost-to-asset ratio Cost/income ratio Provision for impairment on loan losses-to-average gross loans ratio Total risk cost-to-asset ratio Effective tax rate Net loan/(deposit+retail bond) ratio (FX-adjusted) Capital adequacy ratio (consolidated, IFRS) - Basel3 Tier 1 ratio - Basel3 Common Equity Tier 1 ('CET1') ratio - Basel3 Share Data EPS diluted (HUF) (from profit after tax) EPS diluted (HUF) (from adjusted profit after tax) Closing price (HUF) Highest closing price (HUF) Lowest closing price (HUF) Market Capitalization (EUR billion) Book Value Per Share (HUF) Tangible Book Value Per Share (HUF) Price/Book Value Price/Tangible Book Value P/E (trailing, from profit after tax) P/E (trailing, from adjusted profit after tax) Average daily turnover (EUR million) Average daily turnover (million share) 2021 HUF million 456,428 (40,474) 496,902 587,853 660,391 1,313,124 884,012 325,548 103,563 (652,733) (72,538) (90,951) 2021 27,553,384 16,655,367 17,610,471 16,675,058 (955,104) 22,173,249 436,325 278,334 3,036,766 2021 17.0% 18.5% 2.0% 2.62% 5.21% 3.51% 2.59% 49.7% 0.30% 0.29% 15.5% 75% 19.1% 17.5% 17.5% 2021 1,738 1,896 16,600 19,400 12,920 12.6 10,846 10,190 1.5 1.6 10.2 9.4 22 0.5 2022 HUF million 347,081 (245,466) 592,547 690,022 868,487 1,656,571 1,093,579 397,118 165,874 (788,084) (178,465) (97,475) 2022 32,804,210 18,640,624 19,643,558 18,674,389 (1,002,933) 25,188,805 870,682 301,984 3,322,312 2022 11.0% 18.8% 1.9% 2.78% 5.31% 3.51% 2.53% 47.6% 0.73% 0.57% 14.1% 74% 17.5% 16.1% 16.1% 2022 1,288 2,204 10,110 18,600 7,854 7.1 11,865 11,257 0.9 0.9 8.2 4.8 24 0.8 Change % (24) 506 19 17 32 26 24 22 60 21 146 7 % 19 12 12 12 5 14 100 8 9 pps (6.0) 0.3 (0.1) 0.16 0.10 0.00 (0.06) (2.1) 0.42 0.28 (1.3) (1) (1.6) (1.5) (1.5) % (26) 16 (39) (4) (39) (44) 9 10 (44) (45) (20) (49) 7 69 2 Structural adjustments made on consolidated IFRS profit and loss statement as well as balance sheet, together with the calculation methodology of adjusted indicators are detailed in the Supplementary data section of this Report. INTEGRATED ANNUAL REPORT 2022 29 OTP BANK BUSINESS REPORT 2022 (CONSOLIDATED) ACTUAL CREDIT RATINGS S&P GLOBAL OTP Bank and OTP Mortgage Bank – FX long-term issuer credit rating OTP Bank – Dated subordinated FX debt MOODY'S OTP Bank – FX long term deposits OTP Bank – Dated subordinated FX debt OTP Mortgage Bank – Covered bonds SCOPE OTP Bank – Issuer rating OTP Bank – Dated subordinated FX debt Updated: 15/02/2023 ACTUAL ESG RATINGS BBB- BB Baa1 Ba2 A1 BBB+ BB+ AWARDS After 2021, Global Finance magazine chose OTP Bank as the best bank in Hungary again this year. The OTP Group also received the regional recognition of "Best Bank of Central and Eastern Europe", and the Montenegrin and Slovenian subsidiary banks of the OTP Group also proved to be the best at the local level. In the Euromoney Awards for Excellence 2022 competition, OTP Bank received the "Best Bank in Hungary" award. In addition, the Albanian, Bulgarian, Moldovan and Serbian subsidiary banks of the OTP Group also proved to be the best at the local level. In the annual ranking of The Banker magazine, which belongs to the Financial Times group, OTP Group became the "best bank in Central and Eastern Europe". In addition, the OTP Group's Hungarian, Montenegrin, Croatian and Slovenian subsidiary banks received the "Bank of the Year" award. SHARE PRICE PERFORMANCE OTP Bloomberg EMEA Banks Index (relative to OTP) CECE Banking Sector Index (relative to OTP) HUF 21,000 19,000 17,000 15,000 13,000 11,000 9,000 7,000 31/12/2019 30/06/2020 31/12/2020 30/06/2021 31/12/2021 30/06/2022 31/12/2022 INTEGRATED ANNUAL REPORT 2022 30 OTP BANK BUSINESS REPORT 2022 (CONSOLIDATED) CORPORATE STRATEGY OTP Group is the leading universal banking group in Central and Eastern Europe, and one of the most successful financial institutions in Europe. OTP Group’s strategic objective is to meet the needs and expectations of its customers, investors, and employees at the highest possible level, and to set a positive example from environmental, social and corporate governance perspective even at international level. Our skilled and helpful staff, state-of-the-art IT solutions, and universal yet customisable product offering make us a trustworthy partner for customers in eleven countries of the region and, following the financial completion of the already signed purchase agreement, soon also in Uzbekistan. The impressive performance of our employees and the value they create are important building blocks of OTP Group's results. We provide regular training courses to support our highly qualified professionals. OTP Group’s innovations also enhance our competitiveness and contribute to further strengthening our internat ional position. The pillars of our strategy are stability & sustainability, growth, innovation, and profitability. Stability & sustainability OTP Group’s excellent capital and liquidity position provide the fundamentals for stable operation and growth throughout economic cycles. In addition to full compliance with European and local regulations, we promote transparency and prudence, while laying great emphasis to maintaining stability at all times. OTP Group is committed to enforcing sustainability in its socio-economic role and in serving customers, as well as in its own operations. Accordingly, OTP Group aims to be the regional leader in financing a fair and gradual transition to a low-carbon economy and building a sustainable future through our responsible solutions. As part of our social activities, we make a positive impact through our financial awareness raising and donation programmes, and extensive civil society partnerships. As a responsible employer, we have designed complex programmes for employee well-being. Growth We believe in the future of the Central and Eastern European region and intend to actively contribute to its progress. Our products and services are designed to help the region grow faster than the EU average. We aim to increase our market share on all our CEE markets through organic growth and acquisitions. Our acquisition strategy is based on creating shareholder value by achieving optimal scale of economics and leveraging OTP's expertise in the regional markets. We keep exploring new acquisition opportunities, primarily in the CEE region, and in other countries with high growth potential, too. Innovation To meet our customers' needs, we develop convenient and contemporary services that are easy and fast to access anytime, from anywhere. OTP Bank's innovations are popular for a good reason – millions of customers use our products and services regularly. Digital developments contribute to enhancing customer experience as well as to improving the efficiency of business processes. To explore new directions and opportunities, we have established our own futurology team, and are incorporating best practices. We have hundreds of developments underway. We are partnering with the region’s leading fintech companies, and have made considerable progress in building beyond-banking ecosystems, in addition to building our own successful fintech company. Profitability Profitability is crucial for maintaining stable operations, as well as for continuous development and renewal. Our long-term profitability is underpinned by the revenue margin supported by excellent customer experience and cost-efficient processes, along with geographical diversification, which has been increasing in recent years. The market recognises our success in creating shareholder value through favourable valuation compared to European and regional peers. INTEGRATED ANNUAL REPORT 2022 31 OTP BANK BUSINESS REPORT 2022 (CONSOLIDATED) MANAGEMENT’S ANALYSIS OF THE FULL-YEAR 2022 RESULTS OF OTP GROUP The overall performance of 2022 was shaped mainly by the direct and indirect impact of the war between Russia and Ukraine broken out on 24 February. As part of the acquisition activity, in 2022 OTP successfully completed the purchase of Alpha Bank in Albania, and the 3Q results already incorporated the balance sheet and P&L numbers of the newly acquired entity. Consolidated earnings: HUF 347 billion profit after tax, y-o-y stable net interest margin, improving cost efficiency and portfolio quality with FX-adjusted performing loan volume growth of 15% y-o-y without the Russian and Ukrainian volumes, but including the Albanian acquisition In 2022 OTP Group posted HUF 347.1 billion profit after tax. The significant, y-o-y 24% drop was due to the massive increase of the negative adjustment items. The annual ROE was 11% (-6.0 pps y-o-y). The total volume of adjustment items amounted to -HUF 245 billion underpinning a y-o-y six-fold increase. The major items were as follows: ➢ -HUF 91.4 billion tax on financial institutions including both the banking tax and the windfall tax (after tax); ➢ -HUF 59.3 billion on goodwill/investment impairment charges (after tax); ➢ -HUF 36.5 billion expected one-of effect of the extension of the interest rate cap for certain loans in Hungary (after tax); ➢ -HUF 35 billion impairments on Russian government bonds held at OTP Core and DSK Bank (after tax); ➢ -HUF 10.4 billion effect of the winding up Sberbank Hungary (after tax); ➢ -HUF 2.5 billion expected one-off negative effect of the debt payment moratorium in Hungary (after tax); ➢ -HUF 14 billion other items. The profit after tax, as well as the balance sheet items were substantially affected by the currency moves: the average rate of the Hungarian Forint y-o-y depreciated against all currencies, the most significant weaknenig (-37.5%) was suffered against RUB. The weight of exposures towards Russia and Ukraine was shaped partially by FX moves, but also by deliberate or forced business policy measures. In Russia the profit after tax in local currency dropped from RUB 9.1 billion to 3.9 billion ( -57% y-o-y); the grow loan portfolio eroded by 12% y-o-y in RUB, within that the corporate exposures decreased by 75%. The intragroup funding declined to nil, and there is a Tier 2 loan expiring in 2031 in the amount of HUF 10 billion. The weight of Russian assets in the consolidated total assets comprised 3.1% by the end of 2022, while net loans represented 3.3%, respectively. Under an unexpected and extremely negative scenario of deconsolidating the Russian entity and writing down the outstanding gross intragroup exposure as well, the effect for the consolidated CET1 ratio would be -71 bps. In Ukraine the lending activity suffered a major setback after 24 February, loan volumes dropped by 16% y-o-y, however the deposit book advanced by 21%, FX-adjusted. The weight of the Ukrainian assets within the Group comprised 3.2%, while net loans represented 2.2% within the consolidated loan book. The volume of gross intragroup funding towards Ukraine comprised HUF 84 billion. In 2022 the Ukrainian operation posted almost HUF 16 billion loss, however after the negative results in 1H, the bank managed to turn that around and reached a positive result in 2H. The provision coverage of the gross Ukrainian loan book reached almost 22% by the end of 2022 (+14.7 pps y-o-y). Under an unexpected and extremely negative scenario of deconsolidating the Ukrainian entity and writing down the outstanding gross intragroup funding as well, t he effect for the consolidated CET1 ratio would be +1 bp. In the case of Ukraine and Russia OTP management applies a „going concern” approach, however in Russia the management is still considering all strategic options, though a Russian presidential decree in October 2022 prohibited the sale of foreign owned banks. 2022 earnings to a large extent were shaped by the 32% improvement of operating result; total risk costs grew by 146% y-o-y mainly due to higher Russian and Ukrainian provisions. The dynamic increase of total income (+26%) was supported by all lines. The net interest income advanced by 24% y-o-y, whereas the net fee and commission income grew somewhat slower, by 22% y-o-y. Other net non-interest income surged by 60% y-o-y, within that FX results more than doubled. INTEGRATED ANNUAL REPORT 2022 32 OTP BANK BUSINESS REPORT 2022 (CONSOLIDATED) The consolidated net interest margin remained flat y-o-y (3.51%). Apart from the Russian market, in other geographies rate hike trend continued. In 2022 the Ukrainian, Moldavian and Hungarian policy rates closed at the highest levels (25%, 20% and 18%, respectively). The positive impact of higher rates on the interest income kicks in only gradually as a result of the different dynamics in deposit and loan repricing. In other markets like Bulgaria, Ukraine, Slovenia, Moldova and Romania the NIM improved in 2022 y-o-y; at OTP Core, however it eroded by 28 bps y-o-y. The consolidated operating expenses grew by 21% y-o-y, the underlying inflation above 10% in most of the countries took its toll through all cost elements. The consolidated cost-to-income ratio improved by 2.1 pps y-o-y to 47.6%; the cost-to-asset ratio (2.53%) declined by 6 bps y-o-y. Total risk costs for 2022 amounted to -HUF 178 billion, two and the half times higher than in 2021. Within that the total volume of credit risk costs reached -HUF 135.2 billion versus -HUF 46 billion a year ago. The credit risk cost rate stood at 0.73% (+42 bps y-o-y). Without the Russian and Ukrainian operations the yearly credit risk costs would be +HUF 7 billion implying a CoR of -0.04% versus 0.19% in 2021. The FX-adjusted consolidated performing (Stage 1+2) loan volumes increased by 12% y-o-y. Without the Ukrainian and Russian volumes but incorporating the acquisition impact of Alpha Bank Albania the loan book advanced by 15%. As a result, the growth of the portfolio reached close to HUF 2,300 billion in 2022. Apart from the Ukrainian, Russian and Moldavian subsidiaries, all other operations posted an increase of around or above 10%, whereas in those three countries the decline was 27, 16 and 5% y -o-y, respectively. It was positive that alongside the strong volume dynamics OTP managed to improve its markets shares in many countries and segments. As for the major segments, the fastest FX-adjusted performing loan volume increase was posted in the corporate sector (+20% y-o-y), followed by MSE loans (+12%) which was also supported by the new subsidized structures in Hungary. The consumer book grew by 3%, while the mortgage book by 10% y -o-y, respectively. The FX-adjusted deposits grew by 14% y-o-y which corresponds to about HUF 3,000 billion increase. Without the Russian, Ukrainian volumes the growth was 13% y-o-y. In 4Q the deposit growth slowed down to 2% q-o-q. The consolidated net loan-to-deposit ratio marginally declined to 74% (-1 pp y-o-y). In 2022 OTP Bank issued two international public bond deals with EUR 400 million and 650 million face value, furthermore it also printed a USD 60 million private placement. In Hungary the Bank also tested the market with 2 additional transactions and raised HUF 36.2 billion in total. All issued bonds were MREL-eligible. In February 2023 OTP Bank issued USD 650 million Tier 2 bonds. The credit profile of the consolidated loan book kept further improving in 2022, the major indicators shaped favorably. The Stage 3 ratio under IFRS 9 comprised 4.9% of the gross loan exposure by the end of 4Q 2022 underpinning a y-o-y 0.3 pp improvement. The own coverage of the Stage 3 exposures was 61%. On the Group level the Ukrainian and Russian operations had the highest Stage 3 ratio (18.1% and 15.7%, respectively). The consolidated Stage 2 ratio stood at 11.6% at the end of 2022. The general Hungarian payment moratorium ceased to exist by the end of 2022. At OTP Core and Merkantil Bank altogether 2.1% of their aggregated gross loan volumes were under the expiring moratorium (HUF 148 billion). There is still a moratorium in place for agricultural companies until the end of 2023, the affected volumes comprised HUF 57 billion at OTP Core and Merkantil Group in total (0.8% of their aggregated gross loan volumes). Acquisitions On 6 December 2021 OTP Bank signed an acquisition agreement with Alpha International Holdings Single Member S.A. on purchasing 100% shareholding of Alpha Bank SH.A., the Albanian subsidiary of the Greek Alpha Bank S.A. The purchase price has been agreed at EUR 55 million. The financial closing of the transaction was completed on 18 July 2022. On 31 May 2021 OTP Bank signed a share sale and purchase agreement on purchasing 100% shareholding of Nova KBM d.d. and its subsidiary, which are 80% owned by funds managed by affiliates of Apollo Global Management, Inc. and 20% by EBRD. The financial closing of the transaction took place on 6 February 2023, after obtaining all the necessary regulatory approvals. On 12 December 2022 OTP Bank signed a purchase and sale contract for the purchase of the majority stake of Ipoteka Bank and its subsidiaries with the Ministry of Finance of the Republic of Uzbekistan. OTP Bank will purchase 100% of the shares held by the Ministry of Finance of the Republic of Uzbekistan (nearly 97% INTEGRATED ANNUAL REPORT 2022 33 OTP BANK BUSINESS REPORT 2022 (CONSOLIDATED) total shareholding) in two steps: 75% of the shares now and the remaining 25% three years after the financial closing of the first transaction. The financial closure of the first transaction is expected in 1H 2023 subje ct to obtaining all the necessary regulatory approvals. The Nova KBM acquisition completed in February 2023 and the pending acquisition of Ipoteka Bank in Uzbekistan (expected to be financially closed in 2Q) may substantially contribute to the consolidated profit after tax; in addition to this, the expected positive after tax effect of one-off items to be booked in relation to the consolidation of Nova KBM (badwill, PPA, initial risk cost, etc.) and presented among the adjustments might reach EUR 230 million. Consolidated capital adequacy ratio (in accordance with BASEL III) At the end of December 2022, the consolidated CET1 ratio under the accounting scope of consolidation according to IFRS was 16.1% (-1.5 pps y-o-y). This equals to the Tier 1 ratio. By the end of 2022 the effective regulatory minimum requirement for the consolidated Tier 1 capital adequacy ratio was 10.7% which also incorporated the effective SREP rate, whereas the minimum CET1 requirement was 8.8%. The risk weighted assets (RWA) under the accounting scope of consolidation increased by more than HUF 3,700 billion in 2022 (+22% y-o-y), partly due to the credit risk RWA growth of 23% y-o-y. The consolidated regulatory capital increased by HUF 374 billion y-o-y as a result of higher revaluation reserves booked in the comprehensive income (+HUF 180 billion y-o-y) due to the weaker HUF. The consolidated regulatory capital incorporated the annual eligible profit (HUF 262 billion after the deduction of the dividend which comprised HUF 84 billion). Credit rating, shareholder structure There was no change in S&P Global Ratings credit assessment in 2022, however on 16 August 2022 the rating agency has changed the outlook of its 'BBB/A-2' long and short-term issuer credit ratings on OTP Bank Plc. and OTP Mortgage Bank Ltd. to negative from stable. However, on 30 January 2023 the agency downgraded OTP Bank’s long-term issuer credit rating from ꞌBBBꞌ to ꞌBBB-ꞌ, the outlookis stable; the credit rating of the dated Tier2 instrument issued in February 2023 is ꞌBBꞌ. There was no change at Moody’s either in 2022, accordingly, the long-term FX deposit rating of OTP Bank Plc. remained ꞌBaa1ꞌ. However, the dated subordinated FX debt rating was changed to ꞌBa2ꞌ on 6 February 2023. Simultaneously, OTP Mortgage Bank Ltd.’s long-term issuer rating was downgraded from ‘Baa2’ to ‘Baa3’. Its mortgage bond rating remained ꞌA1ꞌ. OTP Bank Plc’ issuer rating at Scope Ratings was ‘BBB+’ and the subordinated debt rating ‘BB+’, respectively; on 6 December 2022 the outlook changed from stable to negative. Regarding the ownership structure of the Bank, on 31 December 2022 the following investors had more than 5% influence (voting rights) in the Company: MOL (the Hungarian Oil and Gas Company, 8.57%) and Groupama Group (5.09%). INTEGRATED ANNUAL REPORT 2022 34 OTP BANK BUSINESS REPORT 2022 (CONSOLIDATED) SUMMARY OF ECONOMIC POLICY MEASURES MADE IN THE LAST PERIOD AND OTHER IMPORTANT DEVELOPMENTS, AS WELL AS POST-BALANCE SHEET EVENTS Post-balance sheet event cover the period until 17 February 2023. Hungary • On 4 January 2023 OTP Bank announced that the National Bank of Hungary imposed the below additional capital requirements for OTP Group, on consolidated level, effective from 1 January 2023 until the next review: o 1.13 pps in case of the Common Equity Tier 1 (CET1) capital, accordingly the minimum requirement for the consolidated CET1 ratio is 5.63% (without regulatory capital buffers); o 1.50 pps in case of the Tier 1 capital, accordingly the minimum requirement for the consolidated Tier 1 ratio is 7.50% (without regulatory capital buffers); o 2.00 pps in case of the Total SREP Capital Requirement (TSCR), accordingly the minimum requirement for the consolidated capital adequacy ratio is 10.00% (without regulatory capital buffers). • On 23 January 2023 the Ministry of Economic Development announced that the Gábor Baross Reindustrialization Loan Programme will be launched from February by Eximbank, with a total available amount of HUF 700 billion. Under the scheme, the HUF and EUR denominated loans will be available for all purposes, depending on the loan amount either through commercial banks or directly through Eximbank, but all the funding need will be provided or refinanced by Eximbank. The interest rate of the loans will be fixed throughout the whole tenor, and will be typically maximum 6% in the case of HUF loans and maximum 3.5% in the case of EUR loans. • On 24 January 2023 the National Bank of Hungary kept the reference rates unchanged . The NBH held a long-term deposit tender on 25 January, and from 1 February discount bill auctions are held on a weekly basis. The NBH said that it will continue to meet foreign currency liquidity needs in the coming months to reach market balance related to the energy account. Furthermore, the Deputy Governor announced that effective from April the mandatory reserve requirement for banks will be increased from 5% to 10%. • On 27 January 2023 S&P Global Ratings lowered the long- and short-term foreign and local currency sovereign credit ratings on Hungary to 'BBB-/A-3' from 'BBB/A-2'. The outlook on the long-term ratings is stable. • According to the press release published on 30 January 2023 by S&P Global Ratings, the rating agency downgraded its long- and short-term issuer credit ratings, as well as the long- and short-term resolution counterparty ratings on OTP Bank Plc. and OTP Mortgage Bank Ltd. to 'BBB-/A-3' from 'BBB/A-2', and the senior preferred debt rating of OTP Bank Plc. was also downgraded by one notch to 'BBB-'. The outlook on the long-term issuer ratings is stable. • The financial completion of the transaction to purchase 100% shareholding of Nova KBM d.d. and its subsidiary in Slovenia – after obtaining all necessary regulatory approvals – has been completed on 6 February 2023. • According to the press release published on 6 February 2023 by Moody’s Investors Service, the rating agency concluded the ratings review initiated in July 2021. The rating agency downgraded OTP Bank’s subordinated bond rating by one notch to 'Ba2' from 'Ba1'. All other ratings and assessments of OTP Bank have been affirmed. Outlook is stable. At the same time, Moody’s Investors Service downgraded the backed long-term domestic currency issuer rating of OTP Mortgage Bank to 'Baa3' from 'Baa2'. All other ratings and assessments of OTP Mortgage Bank have been affirmed. Outlook is stable. • On 15 February 2023 as value date OTP Bank issued Tier 2 Notes in the aggregate nominal amount of USD 650 million. The Tier 2 Notes with 10.25 years maturity, redeemable at par any time during the 3-month period prior to the Reset Date at 5.25 years, were priced on 8 February 2023. Bulgaria • On 17 February 2023 the Minister of Finance announced that the originally planned accession date to the Eurozone of 1 January 2024 will be postponed. The new target date will be declared by the new Parliament formed after the elections scheduled to 2 April. INTEGRATED ANNUAL REPORT 2022 35 OTP BANK Serbia BUSINESS REPORT 2022 (CONSOLIDATED) • On 12 January 2023 the central bank hiked the base rate by 25 bps to 5.25%. • On 9 February 2023 the central bank hiked the base rate by 25 bps to 5.5%. Slovenia • On 2 February 2023 the ECB hiked its key interest rate by 50 bps to 3.0%. • On 7 February 2023 Moody’s upgraded the deposit rating of NKBM to ’A3’, the outlook is stable. At the same time, the Bank’s unsecured non-preferred debt rating was upgraded to ’Baa3’. Romania • On 20 January 2023 the central bank hiked the base rate by 25 bps to 7%. Russia • Effective from 1 January 2023 the capital conservation buffer in Russia decreased temporarily to 0% from 2.5%, which does not affect the minimum requirement for OTP Group. Ukraine • Effective from 1 January 2023 the Ukrainian central bank raised the mandatory reserve requirement for local and foreign currency denominated deposits by 5-5 pps each, to 5% and 15%, respectively. • On 10 February 2023 Moody’s downgraded the Ukrainian sovereign credit rating from ’Caa’ to ’Ca’, the outlook is stable. Moldova • On 7 February 2023 Moldova's central bank cut its key rate to 17% from 20%. INTEGRATED ANNUAL REPORT 2022 36 OTP BANK BUSINESS REPORT 2022 (CONSOLIDATED) CONSOLIDATED PROFIT AFTER TAX BREAKDOWN BY SUBSIDIARIES (IFRS)3 Consolidated profit after tax Adjustments (total) Consolidated adjusted profit after tax Banks total1 OTP Core (Hungary)2 DSK Group (Bulgaria)3 OBH (Croatia)4 OTP Bank Serbia5 SKB Banka (Slovenia) OTP Bank Romania6 OTP Bank Ukraine7 OTP Bank Russia8 CKB Group (Montenegro)9 OTP Bank Albania10 OTP Bank Moldova Leasing Merkantil Group (Hungary)11 Asset Management OTP Asset Management (Hungary) Foreign Asset Management Companies (Ukraine, Romania, Bulgaria)12 Other Hungarian Subsidiaries Other Foreign Subsidiaries13 Corporate Centre14 Eliminations Profit after tax of the Hungarian operation15 Adjusted profit after tax of the Hungarian operation15 Profit after tax of the Foreign operation16 Adjusted profit after tax of the Foreign operation16 Share of Hungarian contribution to the adjusted profit after tax Share of Foreign contribution to the adjusted profit after tax 2021 HUF million 456,428 (40,474) 496,901 468,962 213,377 76,790 33,448 32,104 16,822 4,253 39,024 37,624 4,140 5,522 5,858 7,998 7,998 6,321 6,116 205 10,205 50 2,887 479 229,194 241,304 227,234 255,597 49% 51% 2022 HUF million 347,081 (245,466) 592,547 535,717 253,232 119,885 42,801 36,873 23,860 3,071 (15,922) 42,548 9,791 10,175 9,403 10,971 10,971 9,621 9,357 263 27,645 (141) 2,968 5,767 167,057 303,873 180,024 288,674 51% 49% Change % (24) 506 19 14 19 56 28 15 42 (28) (141) 13 137 84 61 37 37 52 53 28 171 (385) 3 (27) 26 (21) 13 3 (3) 3 Belonging footnotes are in the Supplementary data section of the Report. INTEGRATED ANNUAL REPORT 2022 37 OTP BANK BUSINESS REPORT 2022 (CONSOLIDATED) CONSOLIDATED STATEMENT OF PROFIT OR LOSS Main components of the adjusted Statement of recognized income Consolidated profit after tax Adjustments (total, after corporate income tax) Dividends and net cash transfers (after tax) Goodwill/investment impairment charges (after tax) Special tax on financial institutions (after tax) Expected one-off negative effect of the debt repayment moratorium in Hungary (after tax) Expected one-off effect of the interest rate cap for certain loans in Hungary (after tax) Effect of the winding up of Sberbank Hungary (after tax) Effect of acquisitions (after tax) Result of the treasury share swap agreement (after tax) Impairments on Russian government bonds at OTP Core and DSK Bank booked in 2022 (after tax) Consolidated adjusted profit after tax Profit before tax Operating profit Total income Net interest income Net fees and commissions Other net non-interest income Foreign exchange result, net Gain/loss on securities, net Net other non-interest result Operating expenses Personnel expenses Depreciation Other expenses Total risk costs Provision for impairment on loan losses Other provision Corporate taxes Indicators ROE (from profit after tax) ROE (from adjusted profit after tax) ROA (from adjusted profit after tax) Operating profit margin Total income margin Net interest margin Net fee and commission margin Net other non-interest income margin Cost-to-asset ratio Cost/income ratio Provision for impairment on loan losses-to-average gross loans ratio Total risk cost-to-asset ratio Effective tax rate Non-interest income/total income EPS base (HUF) (from profit after tax) EPS diluted (HUF) (from profit after tax) EPS base (HUF) (from adjusted profit after tax) EPS diluted (HUF) (from adjusted profit after tax) Comprehensive Income Statement Consolidated profit after tax Fair value changes of financial instruments measured at fair value through other comprehensive income Foreign currency translation difference Change of actuarial costs (IAS 19) Net comprehensive income o/w Net comprehensive income attributable to equity holders Net comprehensive income attributable to non-controlling interest Average exchange rate1 of the HUF HUF/EUR HUF/CHF HUF/USD 2021 HUF million 456,428 (40,474) 729 1,909 (18,893) 2022 HUF million 347,081 (245,466) 1,927 (59,254) (91,353) (15,040) (2,473) 0 0 (15,506) 6,326 (36,585) (10,389) (15,594) 3,028 0 (34,775) 496,902 587,853 660,391 1,313,124 884,012 325,548 103,563 44,251 9,726 49,586 (652,733) (340,201) (72,816) (239,716) (72,538) (46,006) (26,532) (90,951) 2021 17.0% 18.5% 2.0% 2.62% 5.21% 3.51% 1.29% 0.41% 2.59% 49.7% 0.30% 0.29% 15.5% 33% 1,739 1,738 1,896 1,896 2021 456,428 592,547 690,022 868,487 1,656,571 1,093,579 397,118 165,874 90,691 1,579 73,604 (788,084) (396,304) (84,663) (307,117) (178,465) (135,231) (43,234) (97,475) 2022 11.0% 18.8% 1.9% 2.78% 5.31% 3.51% 1.27% 0.53% 2.53% 47.6% 0.73% 0.57% 14.1% 34% 1,289 1,288 2,204 2,204 2022 347,081 (44,877) (119,378) 61,729 42 473,322 472,281 1,041 2021 HUF 359 332 303 179,623 1,016 408,342 407,695 647 2022 HUF 391 390 373 Change % (24) 506 164 384 (84) 1 (52) 19 17 32 26 24 22 60 105 (84) 48 21 16 16 28 146 194 63 7 %/pps (6.0) 0.3 (0.1) 0.16 0.10 0.00 (0.02) 0.12 (0.06) (2.1) 0.42 0.28 (1.3) 1 (26) (26) 16 16 % (24) 166 191 (14) (14) (38) Change % 9 18 23 1 Exchange rates presented in the tables of this report should be interpreted as follows: the value of a unit of the other currency expressed in Hungarian forint terms, i.e. HUF/EUR represents the HUF equivalent of one EUR. INTEGRATED ANNUAL REPORT 2022 38 OTP BANK BUSINESS REPORT 2022 (CONSOLIDATED) ASSET-LIABILITY MANAGEMENT Similar to previous periods OTP Group maintained a strong and safe liquidity position… The primary objective of OTP Bank in terms of asset-liability management has not changed, that is to ensure that the Group’s liquidity is maintained at a safe level. Refinancing sources of the European Central Bank are available for OTP (ECB repo eligible security portfolio on Group level exceeded EUR 1.8 billion). Total liquidity reserves of OTP Bank remained steadily and substantially above the safety level. As of 31 December 2022 the gross liquidity buffer was around EUR 6.9 billion equivalent. The level of these buffers is significantly higher than the maturing debt within one year and the reserves required to manage possible liquidity shocks. As of 31 December 2022 OTP Group consolidated liquidity coverage (LCR) ratio was 172% (4Q 2021: 180%) while NSFR compliance has remained comfortable (4Q 2022: 131%). The volume of issued securities doubled on a consolidated basis y-o-y, mainly because of senior preferred bond issuances in the second half of the year. To meet MREL requirements OTP Bank issued on the international bond markets green bonds in the amount of EUR 400 million in July and USD 60 million in September, followed by a EUR 650 million transaction in December. On the domestic bond market OTP Mortgage Bank issued mortgage bonds in the amount of HUF 92 billion and in the fourth quarter OTP Bank issued notes in the total amount of HUF 36 billion. Bonds were redeemed in the total amount of HUF 6 billion in the course of 2022. …and kept its interest-rate risk exposures low Due to the liabilities, which respond to yield changes only to a moderate extent, the Bank has an interest-rate risk exposure resulting from its business operations. The Bank considers the reduction and closing of this exposure as a strategic matter. Although the stock of variable interest rate assets decreased as a result of the interest rate cap measures introduced last year, they are still significant at group level (EUR, BGN and HUF) and quickly follow the rise in money market interest rates: the loans get repriced typically in 3 months, the interest rate swaps (IRS) in 6 months, and other liquid assets within 1-3 months. On the deposit side the repricing is not automatic, its extent and speed depends on the level of interest rates and the liquidity position of the Bank. Market Risk Exposure of OTP Group The consolidated capital requirement of the trading book positions, the counterparty risk and the FX risk exposure represented HUF 51 billion in total. OTP Group is an active participant of the international FX and derivative market. Open FX positions of group members are restricted to individual and global net open position limits (overnight and intraday), and to stop-loss limits. The open positions of the group members outside Hungary except for the Bulgarian DSK Bank – the EUR/BGN exposure of DSK under the current exchange rate regime does not represent real risk – were negligible measured against either the balance sheet total or the regulatory capital. Therefore, the group level FX exposure was concentrated at OTP Bank. INTEGRATED ANNUAL REPORT 2022 39 OTP BANK BUSINESS REPORT 2022 (CONSOLIDATED) CONSOLIDATED STATEMENT OF FINANCIAL POSITION OF OTP GROUP Main components of the adjusted balance sheet TOTAL ASSETS Cash, amounts due from Banks and balances with the National Banks Placements with other banks, net of allowance for placement losses Securities at fair value through profit or loss Securities at fair value through other comprehensive income Net customer loans Net customer loans (FX-adjusted1) Gross customer loans Gross customer loans (FX-adjusted1) Gross performing (Stage 1+2) customer loans (FX-adjusted1) o/w Retail loans Retail mortgage loans (incl. home equity) Retail consumer loans SME loans Corporate loans Leasing Allowances for loan losses Allowances for loan losses (FX-adjusted1) Associates and other investments Securities at amortized costs Tangible and intangible assets, net o/w Goodwill, net Tangible and other intangible assets, net Other assets TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY Amounts due to banks, the National Governments, deposits from the National Banks and other banks, and Financial liabilities designated at fair value through profit or loss Deposits from customers Deposits from customers (FX-adjusted1) o/w Retail deposits Household deposits SME deposits Corporate deposits Accrued interest payable related to customer deposits Liabilities from issued securities o/w Retail bonds Liabilities from issued securities without retail bonds Other liabilities Subordinated bonds and loans Total shareholders' equity Indicators Loan/deposit ratio (FX-adjusted1) Net loan/(deposit + retail bond) ratio (FX-adjusted1) Stage 1 loan volume under IFRS 9 Stage 1 loans under IFRS9/gross customer loans Own coverage of Stage 1 loans under IFRS 9 Stage 2 loan volume under IFRS 9 Stage 2 loans under IFRS9/gross customer loans Own coverage of Stage 2 loans under IFRS 9 Stage 3 loan volume under IFRS 9 Stage 3 loans under IFRS9/gross customer loans Own coverage of Stage 3 loans under IFRS 9 90+ days past due loan volume 90+ days past due loans/gross customer loans Consolidated capital adequacy - Basel3 Capital adequacy ratio (consolidated, IFRS) Tier 1 ratio Common Equity Tier 1 ('CET1') capital ratio Regulatory capital (consolidated) o/w Tier 1 Capital o/w Common Equity Tier 1 capital Tier 2 Capital Consolidated risk weighted assets (RWA) (Credit&Market&Operational risk) o/w RWA (Credit risk) RWA (Market & Operational risk) Closing exchange rate of the HUF HUF/EUR HUF/CHF HUF/USD 2021 HUF million 27,553,384 2,556,035 1,584,860 341,397 2,224,510 15,743,922 16,655,367 16,634,454 17,610,471 16,675,058 9,035,587 4,338,022 3,978,753 718,813 6,411,601 1,227,870 (890,532) (955,104) 67,223 3,891,335 689,290 105,640 583,650 454,811 27,553,384 2022 HUF million 32,804,210 4,221,392 1,351,081 436,387 1,739,603 18,640,624 18,640,624 19,643,558 19,643,558 18,674,389 9,686,987 4,787,822 4,094,534 804,631 7,697,424 1,289,977 (1,002,933) (1,002,933) 73,849 4,891,938 738,105 68,319 669,786 711,230 32,804,210 1,608,533 1,517,349 21,068,644 22,173,249 15,105,139 12,598,433 2,506,706 7,059,715 8,396 436,325 0 436,325 1,124,782 278,334 3,036,766 2020 79% 75% 13,561,883 81.5% 1.0% 2,194,620 13.2% 10.0% 877,951 5.3% 60.5% 535,445 3.2% 2020 19.1% 17.5% 17.5% 3,191,765 2,926,882 2,926,882 264,883 16,691,315 14,992,797 1,698,518 2020 HUF 369 357 326 25,188,805 25,188,805 16,314,389 13,639,627 2,674,762 8,844,168 30,247 870,682 35,766 834,916 1,603,078 301,984 3,322,312 2021 78% 74% 16,387,792 83.4% 1.0% 2,286,597 11.6% 10.7% 969,169 4.9% 61.0% 601,268 3.1% 2021 17.5% 16.1% 16.1% 3,565,932 3,277,984 3,277,984 287,949 20,405,328 18,477,102 1,928,226 2021 HUF 400 407 376 Change % 19 65 (15) 28 (22) 18 12 18 12 12 7 10 3 12 20 5 13 5 10 26 7 (35) 15 56 19 (6) 20 14 8 8 7 25 260 100 91 43 8 9 pps (1) (1) 21 1.9 0.0 4 (1.6) 0.8 10 (0.3) 0.6 12 (0.2) %/pps (1.6) (1.5) (1.5) 12 12 12 9 22 23 14 Change % 8 14 15 1 For the FX-adjustment, the closing cross currency rates for the current period were used in order to calculate the HUF equivalent of loan and deposit volumes in the base periods. INTEGRATED ANNUAL REPORT 2022 40 OTP BANK BUSINESS REPORT 2022 (CONSOLIDATED) OTP BANK’S HUNGARIAN CORE BUSINESS OTP Core Statement of recognized income: Main components of the Statement of recognised income Profit after tax without received dividend Dividend received from subsidiaries Profit after tax Adjustments (total, after tax) Adjusted profit after tax Profit before tax Operating profit Total income Net interest income Net fees and commissions Other net non-interest income Operating expenses Total risk costs Provision for impairment on loan losses Other provisions Corporate income tax Indicators ROE ROA Operating profit margin Total income margin Net interest margin Net fee and commission margin Net other non-interest income margin Operating costs to total assets ratio Cost/income ratio Provision for impairment on loan losses / average gross loans1 Effective tax rate 2021 HUF million 169,067 44,310 213,377 0 213,377 253,972 257,182 546,215 369,309 150,578 26,328 (289,034) (3,210) (1,116) (2,094) (40,594) 2021 11.6% 1.6% 2.0% 4.22% 2.85% 1.16% 0.20% 2.2% 52.9% 0.02% 16.0% 2022 HUF million 27,274 107,907 135,181 (118,051) 253,232 296,672 294,257 637,469 412,611 176,830 48,028 (343,212) 2,415 32,850 (30,435) (43,440) 2022 12.6% 1.6% 1.8% 3.97% 2.57% 1.10% 0.30% 2.1% 53.8% (0.55)% 14.6% Change % (84) 144 (37) 19 17 14 17 12 17 82 19 7 pps 1.0 (0.1) (0.2) (0.25) (0.28) (0.06) 0.10 (0.1) 0.9 (1.3) 1 The adjustments (total, after tax), the profit after tax and the profit after tax without received dividend lines of OTP Core were retroactively corrected for 2021. INTEGRATED ANNUAL REPORT 2022 41 OTP BANK BUSINESS REPORT 2022 (CONSOLIDATED) Main components of OTP Core’s Statement of financial position: Main components of balance sheet closing balances Total Assets Net customer loans Net customer loans (FX-adjusted) Gross customer loans Gross customer loans (FX-adjusted) Stage 1+2 customer loans (FX-adjusted) Retail loans Retail mortgage loans (incl. home equity) Retail consumer loans SME loans Corporate loans Provisions Provisions (FX adjusted) Deposits from customers + retail bonds Deposits from customers + retail bonds (FX-adjusted) Retail deposits + retail bonds Household deposits + retail bonds o/w: Retail bonds SME deposits Corporate deposits Liabilities to credit institutions Issued securities without retail bonds Total shareholders' equity Loan Quality Stage 1 loan volume under IFRS 9 (in HUF million) Stage 1 loans under IFRS 9/gross customer loans Own coverage of Stage 1 loans under IFRS 9 Stage 2 loan volume under IFRS 9 (in HUF million) Stage 2 loans under IFRS 9/gross customer loans Own coverage of Stage 2 loans under IFRS 9 Stage 3 loan volume under IFRS 9 (in HUF million) Stage 3 loans under IFRS 9/gross customer loans Own coverage of Stage 3 loans under IFRS 9 90+ days past due loan volume (in HUF million) 90+ days past due loans/gross customer loans Market Share Loans Deposits Total Assets Performance Indicators Net loans to (deposits + retail bonds) (FX adjusted) Leverage (closing Shareholder's Equity/Total Assets) Leverage (closing Total Assets/Shareholder's Equity) Capital adequacy ratio (OTP Bank, non-consolidated, Basel3, IFRS) Common Equity Tier 1 ratio (OTP Bank, non-consolidated, Basel3, IFRS) 2021 HUF million 14,207,399 5,310,327 5,387,188 5,549,248 5,630,432 5,373,189 3,320,881 1,613,420 1,246,729 460,732 2,052,308 (238,921) (243,244) 10,124,795 10,319,536 6,360,260 4,951,603 0 1,408,657 3,959,276 1,117,086 531,471 2,011,932 2021 4,327,232 78.0% 1.0% 966,727 17.4% 8.9% 255,288 4.6% 42.7% 136,003 2.5% 2021 24.4% 28.2% 26.9% 2021 52% 14.2% 7.1x 25.1% 21.8% 2022 HUF million 15,758,292 6,278,620 6,278,620 6,528,001 6,528,001 6,205,045 3,482,945 1,656,975 1,306,921 519,050 2,722,099 (249,381) (249,381) 11,246,795 11,246,795 6,483,357 5,065,562 35,766 1,417,795 4,763,438 1,251,653 471,773 2,016,019 2022 5,457,140 83.6% 0.8% 747,905 11.5% 8.6% 322,956 4.9% 43.2% 189,870 2.9% 2022 25.5% 29.1% 27.5% 2022 56% 12.8% 7.8x 19.2% 16.3% Change % 11 18 17 18 16 15 5 3 5 13 33 4 3 11 9 2 2 1 20 12 (11) 0 %/pps 26 5.6 (0.2) (23) (6.0) (0.3) 27 0.3 0.5 40 0.5 pps 1.1 0.9 0.6 pps 4 (1.4) 0.8x (5.9) (5.5) In 2022 OTP Core reached an profit after tax of HUF 27.3 billion without dividends received from subsidiaries, against the previous year’s result of HUF 169 billion. In the period under review, most of the negative adjustment items were related either directly to the war, or to the Hungarian Governmernt measures. Out of those items, the largest were the special banking taxes (-HUF 85.2 billion after tax), the effect of goodwill and investment impairment (-64.9), the expected impact of the interest rate cap scheme (-33.3), and the impairment on Russian government bonds held by OTP Bank (-30.3). The adjusted operating profit advanced by 14%, mainly driven by the dynamic expansion of business volumes; at the same time, despite the the net interest margin narrowed significantly, by 28 bps to 2.57%. The margin trajectory was determined mainly by the fixed interest rate asset surplus of the Bank, taking into account the steeply increasing rate environment. Still, due to volume expansion the net interest income grew 12% y-o-y. The net fees and commissions surged by 17%, mainly supported by stronger revenues from deposit-, transaction-, and card-related fees, while income from securities’ sales declined. The other net non-interest income leaped by 82%. In 2022 operating expenses grew 19% y-o-y. Within that, personnel expenses rose by 10% on account of 4% higher average headcount and the implemented wage increases, partly offset by the reduction of employers’ contributions by altogether 4 pps effective from 1 January 2022. Amortization increased by 10%. Other costs grew by one-third, driven by, among others, the higher real-estate-related costs (partly because INTEGRATED ANNUAL REPORT 2022 42 OTP BANK BUSINESS REPORT 2022 (CONSOLIDATED) of moving into the new office building), energy costs and supervisory fees (latter largely due to the increase in deposit protection fee effective from the end of 2021). In 2022 altogether +HUF 2.4 billion total risk costs emerged. Within that, the positive amount of provision for impairment on loan losses reached HUF 32.8 billion, whereas the other risk costs came in at -HUF 30.4 billion. The positive sign of the provision for impairment on loan losses line was determined by the revision of the highly conservative assumptions previously used in the impairment models in 1Q 2022: as the uncertainty about the pandemic and the moratorium abated, provisions were released. Also, in accordance with the relevant regulations, in 2Q 2022 provisions were released in the case of borrowers who exited the moratorium more than six months ago, and have been paying according to their contracts. It was also positive that OTP Factoring continued to realize recoveries mostly on retail claims, moreover in 4Q 2022 such claims held by OTP Factoring were upwardly revaluated, resulting in higher net Stage 3 volumes, too. The other risk costs were related mainly to impairments on government bonds. Credit quality trends remained overall benign. During 2022 the Stage 2 ratio moderated by 6.0 pps to 11.5% (in 2Q the Stage 2 volumes fell by more than HUF 200 billion as borrowers who left the moratorium in November 2021 and resumed normal payment were shifted back into Stage 1 category). The Stage 3 ratio went up by 0.3 pp y-o-y, driven by the 0.6 pp increase in 4Q. Latter was partly owing to the revaluation of Factoring claims, which resulted in higher net Stage 3 volumes; secondly, certain retail loans that had participated in the moratorium were shifted into the Stage 3 basket. Although the Stage 1+2 portfolio’s cumulative own provision coverage dropped by 0.7 pp y-o-y, to 1.8%, this is still way above the pre-pandemic level of 1.3% at the end of 2019. Pursuant to the interest rate cap scheme on variable rate retail mortgage loans, from the beginning of 2022 until 30 June 2023 the reference rate of these loans cannot be higher than the relevant reference rate as at the end of October 2021. From November 2022 until the middle of 2023 the rate cap scheme was extended to market based fixed rate retail mortgages with up to 5 years rate reset period. Furthermore, from the middle of November 2022 until 30 June 2023 the reference rates of certain variable rate loans to micro and small enterprises were also capped at the reference rate levels prevailing end of June 2022. The general payment holiday expired at the end of 2022. The volume of loans under the payment moratorium available for agricultural companies until the end of 2023 stood at HUF 41 billion at the end of 2022, making up 0.6% of OTP Core’s total gross loans. The total assets of OTP Core expanded by 11% y-o-y. Performing (Stage 1+2) loans grew by 15% y-o-y (FX-adjusted), mainly due to the government's and the national bank’s subsidized loan programmes (baby loan, CSOK housing loan, green mortgage loan, home renovation loan, Széchenyi Card scheme). Loan growth was driven by the corporate segment (+33% y-o-y). Since July 2021 the Government introduced subsidized loan facilities for micro and small enterprises through the KAVOSZ Széchenyi Card programme. Under the Széchenyi Card Go! and MAX schemes, by the end of 2022 OTP Bank signed loan agreements worth HUF 593 billion in total, of which HUF 158 billion under the MAX structure available since August. In 2022 the contracted amount of baby loans (prolonged till the end of 2024) was HUF 186 billion, thus the outstanding stock reached HUF 784 billion. Performing cash loan volumes rose by 4% y-o-y. The origination of new cash loans increased by 4% y-o-y, so OTP’s market share reached 38% in 2022 (2021: 38.4%). The volume of performing mortgage loans grew 3% y-o-y. In 2022 as a whole, applications for mortgages dropped 19% y-o-y, but the demand showed a spectacular shift towards subsidized products in the increasing rate environment (+29% y-o-y); on the contrary, demand for market-based mortgage loans declined by 52%. Assets held with the central bank underwent a significant reshuffling, as overnight deposits and mandatory reserves grew (latter mainly on the back of the increase in the minimum reserve requirement from October), whereas longer term deposits dropped. The securities book held by OTP Core continued to include mostly fixed interest rate Hungarian government bonds, the average rate of which portfolio significantly lags behind the the prevailing government bond benchmark yields at the end of 2022. Customer deposits expanded 9% y-o-y (FX-adjusted). The 5% q-o-q increase in retail deposits (including retail bonds) in the first quarter was boosted by the PIT refund in February; then they eroded by 1% q-o-q in each quarter. Corporate deposits grew by 20% over the last 12 months. As for international bond issuances, there were 2 transactions in 3Q and one in the last quarter, in the total notional of EUR 1,050 million and USD 60 million. These bonds amounted to HUF 478 billion at the end of the year and were presented on the liability side of Corporate Centre, not that of OTP Core. INTEGRATED ANNUAL REPORT 2022 43 OTP BANK BUSINESS REPORT 2022 (CONSOLIDATED) OTP FUND MANAGEMENT (HUNGARY) Changes in assets under management and financial performance of OTP Fund Management: Main components of P&L account Adjusted profit after tax Income tax Profit before income tax Operating profit Total income Net fees and commissions Other net non-interest income Operating expenses Other provisions Main components of balance sheet closing balances Total assets Total shareholders' equity Asset under management Assets under management, total (w/o duplicates)1 Volume of investment funds (closing, w/o duplicates) Volume of managed assets (closing) Volume of investment funds (closing, with duplicates)2 bond equity absolute return fund money market mixed commodity market guaranteed 2021 HUF million 6,116 (788) 6,904 6,918 10,044 9,799 245 (3,125) (14) 2022 HUF million 9,357 (1,234) 10,592 10,678 14,585 14,094 491 (3,907) (86) 2021 2022 24,988 12,792 2021 HUF billion 1,331 942 389 1,479 444 342 300 4 345 37 5 27,718 16,993 2022 HUF billion 1,782 1,388 393 1,869 665 296 288 287 285 49 0 Change % 53 57 53 54 45 44 101 25 509 % 11 33 % 34 47 1 26 50 (13) (4) (17) 33 (100) 1 The cumulative net asset value of investment funds and managed assets of OTP Fund Management, eliminating the volume of own investment funds (duplications) being managed in other investment funds and managed assets of OTP Fund Management. 2 The cumulative net asset value of investment funds with duplications managed by OTP Fund Management. In 2022 OTP Fund Management generated HUF 9.4 billion profit, exceeding the 2021 profit by more than 50%. The growth of net fees and commissions stemmed from the 26% surge in assets under management, while average fund management fees were the same as in the base year, sales costs declined. Other income has doubled y-o-y, thanks to the positive revaluation and sale result of the investment units in the Company’s own books. Operating expenses grew by 25% under the pressure of a high-inflation environment. Personnel expenses were 19% higher than in the base year. In Hungary’s fund management market, investment fund volumes were shaped by rising inflation environment, the MNB’s interest rate hikes, and the change in government bond yields in 2022. Given the growth of the portfolio under management, the shift between categories is even more striking, particularly at OTP Fund Management’s money market fund, whose volumes had marginalised when an EU regulation came into force in January 2019, but hit HUF 287 billion by the end of 2022. Among investment funds, bond funds continue to represent the largest category. Their improving popularity, owing to rising government bond yields, and capital inflows both supported a dynamic 50% y-o-y increase in volumes, which hit HUF 665 billion by the end of 2022. Overall, the volume of investment funds of OTP Fund Management expanded by 26% y-o-y, hitting a new record, and exceeding HUF 1,869 billion (with duplications). The Company further strengthened its leadership in the securities market, where its market share stood at 27.1% (+4.3 pps y-o-y) at the end of December 2022. INTEGRATED ANNUAL REPORT 2022 44 OTP BANK BUSINESS REPORT 2022 (CONSOLIDATED) MERKANTIL GROUP (HUNGARY) Performance of Merkantil Group: Main components of P&L account Adjusted profit after tax Income tax Profit before income tax Operating profit Total income Net interest income Net fees and commissions Other net non-interest income Operating expenses Total provisions Provision for impairment on loan losses Other provision Main components of balance sheet closing balances Total assets Gross customer loans Gross customer loans (FX-adjusted) Stage 1+2 customer loans (FX-adjusted) Retail loans Corporate loans Leasing Allowances for possible loan losses Allowances for possible loan losses (FX-adjusted) Deposits from customers Deposits from customer (FX-adjusted) Retail deposits Corporate deposits Liabilities to credit institutions Total shareholders' equity Loan Quality Stage 1 loan volume under IFRS 9 (in HUF million) Stage 1 loans under IFRS 9/gross customer loans Own coverage of Stage 1 loans under IFRS 9 Stage 2 loan volume under IFRS 9 (in HUF million) Stage 2 loans under IFRS 9/gross customer loans Own coverage of Stage 2 loans under IFRS 9 Stage 3 loan volume under IFRS 9 (in HUF million) Stage 3 loans under IFRS 9/gross customer loans Own coverage of Stage 3 loans under IFRS 9 Provision for impairment on loan losses/average gross loans 90+ days past due loan volume (in HUF million) 90+ days past due loans/gross customer loans Performance Indicators ROA ROE Total income margin Net interest margin Operating costs / Average assets Cost/income ratio 2021 HUF million 7,998 (918) 8,916 11,961 23,291 20,680 116 2,495 (11,330) (3,045) (3,093) 48 2021 782,222 444,549 446,453 433,477 4,867 46,897 381,713 (14,230) (14,286) 8,198 8,198 5,166 3,032 688,675 59,246 2021 334,732 75.3% 0.4% 96,982 21.8% 5.3% 12,836 2.9% 60.0% 0.71% 5,852 1.3% 2021 1.0% 14.3% 3.05% 2.71% 1.5% 48.6% 2022 HUF million 10,971 (1,645) 12,616 13,930 24,766 22,537 921 1,307 (10,836) (1,314) (1,068) (246) 2022 948,735 532,054 532,054 517,933 3,148 130,859 383,926 (12,436) (12,436) 6,151 6,151 3,713 2,438 852,738 57,591 2022 453,307 85.2% 0.4% 64,627 12.1% 4.5% 14,120 2.7% 53.1% 0.21% 3,655 0.7% 2022 1.3% 19.1% 2.94% 2.68% 1.3% 43.8% Change % 37 79 41 16 6 9 694 (48) (4) (57) (65) % 21 20 19 19 (35) 179 1 (13) (13) (25) (25) (28) (20) 24 (3) %/pps 35 9.9 0.0 (33) (9.7) (0.8) 10 (0.2) (6.9) (0.49) (38) (0.6) pps 0.3 4.8 (0.11) (0.03) (0.2) (4.9) In 2022, Merkantil Group posted HUF 11 billion adjusted profit after tax (+37% y-o-y), which brought its full-year ROE to 19.1%. Net interest income increased by 9%, while the net interest margin narrowed by 3 basis points. Net fees and commissions grew and other net non-interest income dropped largely due to technical reasons (in 2022, some items were reclassified from other income to net fees and commissions). Operating expenses contracted by 4% y-o-y. In 2022, total risk cost declined, largely because risk model parameters were revised, and agricultural loans subject to the moratorium were reclassified into a riskier category. Stage 3 loans increased by 10% y-o-y, while the Stage 2 portfolio shrank by 33% as the introduction of new forborne rules, from May 2022, led to the reclassification of the volumes subject to the moratorium from Stage 2 to Stage 3. The ratio of Stage 3 loans declined by 0.2 pp y-o-y to 2.7%, and the share of Stage 2 loans fell by 9.7 pps, to 12.1%. INTEGRATED ANNUAL REPORT 2022 45 OTP BANK BUSINESS REPORT 2022 (CONSOLIDATED) loan dynamics was materially The annual increased Merkantil Group’s loan volumes, but was eliminated at consolidated level: in relation to the M12 office building, OTP Real Estate Leasing disbursed loan to another group member, which was presented under corporate loans. Without this amount, FX-adjusted performing (Stage 1+2) loans grew by 8% y-o-y, mostly because corporate loan volumes expanded by 72% (largely owing to an increase in non-agricultural capital goods and working capital), while leasing exposures stagnated. intra-group deal, which influenced by an Hungary introduced preferential, subsidized funding for micro and small enterprises through the KAVOSZ Széchenyi Card system in July 2021. Under the programme, Merkantil Bank signed loan agreements worth more than HUF 84 billion in 2022. In 2022, newly disbursed loan volumes grew by 12% y-o-y, including 45% increase in the financing of capital goods. Merkantil Bank is market leader in new loan placements. INTEGRATED ANNUAL REPORT 2022 46 OTP BANK BUSINESS REPORT 2022 (CONSOLIDATED) IFRS REPORTS OF THE MAIN FOREIGN SUBSIDIARIES OF OTP BANK DSK GROUP (BULGARIA) Performance of DSK Group: Main components of P&L account Adjusted profit after tax Income tax Profit before income tax Operating profit Total income Net interest income Net fees and commissions Other net non-interest income Operating expenses Total provisions Provision for impairment on loan losses Other provision Main components of balance sheet closing balances Total assets Gross customer loans Gross customer loans (FX-adjusted) Stage 1+2 customer loans (FX-adjusted) Retail loans Corporate loans Leasing Allowances for possible loan losses Allowances for possible loan losses (FX-adjusted) Deposits from customers Deposits from customers (FX-adjusted) Retail deposits Corporate deposits Liabilities to credit institutions Total shareholders' equity Loan Quality Stage 1 loan volume under IFRS 9 (in HUF million) Stage 1 loans under IFRS 9/gross customer loans Own coverage of Stage 1 loans under IFRS 9 Stage 2 loan volume under IFRS 9 (in HUF million) Stage 2 loans under IFRS 9/gross customer loans Own coverage of Stage 2 loans under IFRS 9 Stage 3 loan volume under IFRS 9 (in HUF million) Stage 3 loans under IFRS 9/gross customer loans Own coverage of Stage 3 loans under IFRS 9 Provision for impairment on loan losses/average gross loans 90+ days past due loan volume (in HUF million) 90+ days past due loans/gross customer loans Performance Indicators ROA ROE Total income margin Net interest margin Operating costs / Average assets Cost/income ratio Net loans to deposits (FX-adjusted) HUF/BGN (closing) HUF/BGN (average) FX rates 2021 HUF million 76,790 (8,454) 85,244 106,241 178,470 112,869 54,508 11,093 (72,230) (20,997) (18,938) (2,059) 2021 4,627,132 2,922,886 3,171,029 2,974,782 1,745,525 1,006,603 222,654 (193,180) (209,550) 3,785,300 4,117,637 3,633,302 484,334 86,606 699,375 2021 2,454,806 84.0% 1.0% 287,157 9.8% 15.5% 180,922 6.2% 68.2% 0.70% 114,362 3.9% 2021 1.8% 11.8% 4.07% 2.58% 1.65% 40.5% 72% 2021 HUF 188.7 183.3 2022 HUF million 119,885 (12,680) 132,565 142,383 230,834 145,461 68,755 16,618 -88,451 (9,819) (10,992) 1,173 2022 5,946,815 3,584,751 3,584,751 3,458,387 2,003,486 1,176,069 278,832 (154,361) (154,361) 4,893,078 4,893,078 4,012,224 880,854 152,193 779,095 2022 3,177,291 88.6% 1.1% 281,096 7.8% 16.0% 126,364 3.5% 60.2% 0.33% 65,240 1.8% 2022 2.3% 16.7% 4.41% 2.78% 1.69% 38.3% 70% 2022 HUF 204.6 200.1 Change % 56 50 56 34 29 29 26 50 22 (53) (42) (157) % 29 23 13 16 15 17 25 -20 -26 29 19 10 82 76 11 %/pps 29 4.6% 0.0% (2) (2.0) 0.5 (30) (2.7) (8.0) (0.38) (43) (2.1) pps 0.5 4.8 0.34 0.20 0.04 (2.2) (2) Change % 8 9 In 2022, DSK Group posted HUF 120 billion profit after tax, 56% more than in 2021. This was primarily driven by the improved operating profit (+34% y-o-y), and the favourable development of credit risk costs (-53% y-o-y). INTEGRATED ANNUAL REPORT 2022 47 OTP BANK BUSINESS REPORT 2022 (CONSOLIDATED) Within the revenues, the realized interest income on customer loans and other securities and placements by group members also increased in parallel with the rise in the interest rate environment. The 29% y-o-y surge in net interest income in HUF (18% in BGN) was supported by the dynamic loan growth, as well as by the increasing net interest margin. In 2022, net fees and commissions grew by 26% y-o-y, mainly due to the increase in fee income realized on expanding corporate loans and higher transaction fee income in the residential segment. Other income grew by 50% y-o-y in 2022, mostly boosted by the jump in the fourth quarter, which was largely due to an increase in the revaluation result of swap transactions, as well as proceeds from the sale of real estate and leased assets. Operating expenses increased by 22% (by 12% in local currency), mostly as a result of an inflation -induced growth in personnel and utility costs. In 2022, the average number of employees decreased further, and the improvements launched in 2021 for the comprehensive transformation of the bank's business and operating model, continued, which improved its operational effectiveness and financial efficiency. Cost efficiency indicators have improved, the cost/income ratio was 38% in 2022. In 2022, HUF 9.8 billion total risk cost weighed on the profit, 53% less than in the base year. The Stage 3 loans declined to 3.5% by the end of December, while their own provision coverage dropped to 60.2%. The ratio of Stage 2 loans shrunk by 2 pps to 7.8% y-o-y; their own provision coverage was 16% (+0.5 pp y-o-y). Regarding the lending activity, performing (Stage 1+2) loans expanded by 16% y-o-y (FX-adjusted). The retail loan book growth was chiefly driven by the increase of mortgage lending. The performing retail loan portfolio increased by 15% y-o-y. The FX-adjusted corporate performing loan volume increased by 17% y-o-y, amid rising interest rates. The FX-adjusted deposit volume increased by 19% compared to the end of 2021, within which it increased by 6% in the fourth quarter, largely driven by the corporate segment. The Bulgarian bank’s liquidity position is stable, the FX-adjusted net loan/deposit ratio stood at 70% at the end of December (-2 pps y-o-y). As a result of the bank's digital developments, the number of Mobile Bank users is also expanding: in 2022, their number increased by 33%. Nearly a fifth of the customers actively using the bank’s products and services are also users of its digital services. DSK Bank’s capital adequacy ratio (19.8%) remained stable above the regulatory minimum (17.3%) at the end of 2022. The CET1 ratio was 19.8% (regulatory minimum: 13.0%). The bank’s market share by total assets improved to 18.65% at the end of December 2022, thereby jumped to the top of the Bulgarian banking ranking. INTEGRATED ANNUAL REPORT 2022 48 OTP BANK BUSINESS REPORT 2022 (CONSOLIDATED) OTP BANK CROATIA Performance of OTP Bank Croatia: Main components of P&L account Adjusted profit after tax Income tax Profit before income tax Operating profit Total income Net interest income Net fees and commissions Other net non-interest income Operating expenses Total provisions Provision for impairment on loan losses Other provision Main components of balance sheet closing balances Total assets Gross customer loans Gross customer loans (FX-adjusted) Stage 1+2 customer loans (FX-adjusted) Retail loans Corporate loans Leasing Allowances for possible loan losses Allowances for possible loan losses (FX-adjusted) Deposits from customers Deposits from customers (FX-adjusted) Retail deposits Corporate deposits Liabilities to credit institutions Total shareholders' equity Loan Quality Stage 1 loan volume under IFRS 9 (in HUF million) Stage 1 loans under IFRS 9/gross customer loans Own coverage of Stage 1 loans under IFRS 9 Stage 2 loan volume under IFRS 9 (in HUF million) Stage 2 loans under IFRS 9/gross customer loans Own coverage of Stage 2 loans under IFRS 9 Stage 3 loan volume under IFRS 9 (in HUF million) Stage 3 loans under IFRS 9/gross customer loans Own coverage of Stage 3 loans under IFRS 9 Provision for impairment on loan losses/average gross loans 90+ days past due loan volume (in HUF million) 90+ days past due loans/gross customer loans Performance Indicators ROA ROE Total income margin Net interest margin Operating costs / Average assets Cost/income ratio Net loans to deposits (FX-adjusted) HUF/HRK (closing) HUF/HRK (average) FX rates 2021 HUF million 33,448 (7,618) 41,065 43,422 88,736 60,933 18,183 9,619 (45,313) (2,357) 1,767 (4,124) 2021 2,576,445 1,811,376 1,962,890 1,806,394 948,625 732,670 125,100 (109,575) (118,703) 1,899,671 2,065,327 1,541,549 523,778 228,733 351,023 2021 1,448,458 80.0% 0.6% 218,754 12.1% 5.9% 144,163 8.0% 61.4% (0.11)% 73,826 4.1% 2021 1.4% 10.0% 3.73% 2.56% 1.90% 51.1% 89% 2021 HUF 49.1 47.6 2022 HUF million 42,801 (9,294) 52,095 49,013 102,042 70,547 24,692 6,803 (53,029) 3,082 7,102 (4,020) 2022 3,224,955 2,263,825 2,263,825 2,152,201 1,075,342 928,717 148,142 (108,490) (108,490) 2,381,977 2,381,977 1,777,094 604,883 337,047 390,583 2022 1,886,633 83.3% 0.5% 265,568 11.7% 7.3% 111,624 4.9% 70.6% (0.34)% 71,800 3.2% 2022 1.5% 11.4% 3.51% 2.43% 1.83% 52.0% 90% 2022 HUF 53.1 49.7 Change % 28 22 27 13 15 16 36 (29) 17 (231) 302 (3) % 25 25 15 19 13 27 18 (1) (9) 25 15 15 15 47 11 %/pps 30 3.4 0.0 21 (0.3) 1.4 (23) (3.0) 9.2 (0.23) (3) (0.9) pps 0.1 1.4 (0.22) (0.13) (0.08) 0.9 1 Change % 8 4 The Croatian bank generated HUF 42.8 billion profit after tax in 2022, thus its profit jumped by nearly 30% y-o-y, bringing the ROE to 11.4%. The result was partly determined by credit risk costs. In 2022, HUF 3.1 billion positive risk cost supported profit. Within that, the +HUF 7.1 billion credit risk cost was driven by multiple factors: first, provisions were released in the first three quarters, as retail mortgages that left the moratorium were reclassified from Stage 3 to Stage 1 category, while the macroeconomic outlook turned unfavourable in the fourth quarter, necessitating the revision of the risk model parameter in both the retail and the corporate segments. INTEGRATED ANNUAL REPORT 2022 49 OTP BANK BUSINESS REPORT 2022 (CONSOLIDATED) Furthermore, HUF 4 billion other risk cost weighed on the result in 2022, owing to impairment on repo receivables, provisions for legal and tax lawsuits, and redundancy payments. Operating profit improved by 13%. Within that net interest income grew by 16%, chiefly induced by the dynamic increase in performing (Stage 1+2) volumes (+19% y-o-y FX-adjusted), while net interest margin eroded by 13 basis points, to 2.43%. Net fees and commissions grew by 36% y-o-y, mainly as a result of the post-pandemic rebound in economic activity, and the recovery of tourism starting from the second quarter of 2021. The latter ’s effect is also palpable in the y-o-y stronger income from ATMs and currency exchange. Other income fell by 29% last year, partly because of the unfavourable evolution of gain on securities, and in part owing to lower income from currency conversion. Operating cost level was 17% higher than in the base year, while inflation exceeded 13%, and the number of employees remained unchanged y-o-y. Moreover, additional IT costs and expert fees emerged as the euro was adopted in 2023. The bank saved money y-o-y on marketing expenses. Overall, the cost/income ratio declined by 9 pps, to 52.0%. In 2022, the share of Stage 3 loans in the portfolio sank further, thus it stood at 4.9% at the end of December. This process was supported by the overall improvement in the loan portfolio, and by the reclassification into Stage 1 category of the mortgages that left the moratorium and are duly paid. In 2022, HUF 5.6 billion worth of non-performing loans were sold/written off (FX-adjusted). The own provision coverage of Stage 3 loans rose to 70.6% (+9.2 pps y-o-y). Performing (Stage 1+2) loans expanded by an FX-adjusted 19% y-o-y. The retail segment’s growth benefited from the subsidized housing loan facility for first-home-buyers, in a scheme resumed on 21 March 2022. The disbursed volume of cash loans remained on the level of the base year 2021. Corporate loan volumes grew at the strongest rate, by 27% y-o-y. The excellent tourism season, the savings related to the euro conversion, and lower personal consumption preferences led to a 15% y-o-y increase in FX-adjusted deposit volumes. The Croatian bank’s liquidity and capital position is stable; its capital adequacy ratio was 19.6% at the end of December 2022. INTEGRATED ANNUAL REPORT 2022 50 OTP BANK BUSINESS REPORT 2022 (CONSOLIDATED) OTP BANK SERBIA Performance of OTP Bank Serbia: Main components of P&L account Adjusted profit after tax Income tax Profit before income tax Operating profit Total income Net interest income Net fees and commissions Other net non-interest income Operating expenses Total provisions Provision for impairment on loan losses Other provision Main components of balance sheet closing balances Total assets Gross customer loans Gross customer loans (FX-adjusted) Stage 1+2 customer loans (FX-adjusted) Retail loans Corporate loans Leasing Allowances for possible loan losses Allowances for possible loan losses (FX-adjusted) Deposits from customers Deposits from customers (FX-adjusted) Retail deposits Corporate deposits Liabilities to credit institutions Total shareholders' equity Loan Quality Stage 1 loan volume under IFRS 9 (in HUF million) Stage 1 loans under IFRS 9/gross customer loans Own coverage of Stage 1 loans under IFRS 9 Stage 2 loan volume under IFRS 9 (in HUF million) Stage 2 loans under IFRS 9/gross customer loans Own coverage of Stage 2 loans under IFRS 9 Stage 3 loan volume under IFRS 9 (in HUF million) Stage 3 loans under IFRS 9/gross customer loans Own coverage of Stage 3 loans under IFRS 9 Provision for impairment on loan losses/average gross loans 90+ days past due loan volume (in HUF million) 90+ days past due loans/gross customer loans Performance Indicators ROA ROE Total income margin Net interest margin Operating costs / Average assets Cost/income ratio Net loans to deposits (FX-adjusted) HUF/RSD (closing) HUF/RSD (average) FX rates 2021 HUF 32,104 (3,610) 35,714 40,754 83,494 62,497 14,410 6,586 (42,740) (5,040) (387) (4,653) 2021 2,224,715 1,715,347 1,861,471 1,807,788 854,137 861,573 92,078 (44,587) (48,412) 1,238,864 1,347,720 816,861 530,860 584,453 306,630 2021 1,542,170 89.9% 0.7% 123,754 7.2% 6.1% 49,423 2.9% 53.6% 0.02% 33,405 1.9% 2021 1.6% 11.4% 4.07% 3.05% 2.09% 51.2% 135% 2021 HUF 3.1 3.0 2022 HUF 36,873 (6,118) 42,991 58,544 104,524 76,635 17,954 9,934 (45,980) (15,553) (14,422) (1,131) 2022 2,708,993 2,038,480 2,038,480 1,986,879 907,047 979,896 99,935 (62,386) (62,386) 1,551,143 1,551,143 867,997 683,146 682,615 358,120 2022 1,764,677 86.6% 0.9% 222,202 10.9% 7.0% 51,601 2.5% 59.8% 0.74% 34,516 1.7% 2022 1.5% 10.9% 4.14% 3.03% 1.82% 44.0% 127% 2022 HUF 3.4 3.2 Change % 15 69 20 44 25 23 25 51 8 209 (76) % 22 19 10 10 6 14 9 40 29 25 15 6 29 17 17 %/pps 14 (3.3) 0.2 80 3.7 0.9 4 (0.3) 6.2 0.71 3 (0.3) pps (0.1) (0.5) 0.06 (0.02) (0.27) (7.2) (7) Change % 9 5 In 2022, the Serbian Banking Group posted HUF 36.9 billion adjusted profit after tax, 15% more than in 2021. The annual profit was shaped by a 44% surge in operating profit and by the y-o-y tripled risk costs. Over the past 20 months following the completion of the integration, the banking group has been strengthening its credit market position. Based on the latest market data, its market share was 17.3% (+0.7 pp y-o-y) at the end of September 2022, while its total assets rank it second, with 14% market share. The synergy and saving opportunities stemming from the integration were steadily realized: despite the intensifying inflation operating expenses were stable in local currency. Personnel costs rose by 3% y-o-y in local currency; the average number of employees (on FTE basis) dropped by 7% y-o-y (-209 people). Cost efficiency indicators have been firmly improving. In 2022, the cost/income ratio (44.0%) was one of the lowest ones among group members. INTEGRATED ANNUAL REPORT 2022 51 OTP BANK BUSINESS REPORT 2022 (CONSOLIDATED) In full year 2022, core banking revenues were favourable, supported by the intensifying business activity. Net interest income grew by 23% y-o-y (by 12% in local currency), which partly stemmed from the increase in performing loans, but the rising RSD and EUR interest rate environment also made its impact on the predominantly variable-interest-rate loans and through the growing deposit volumes. Annual net interest margin (3.03%) narrowed by 2 bps y-o-y, but has been improving since the second quarter. Net fees and commissions expanded by 25% y-o-y (+13% in local currency) last year, predominantly owing to the rise in account fees. The annual profit dynamics was chiefly shaped by risk costs. Credit risk costs grew by HUF 14 billion y-o-y, predominantly in the fourth quarter of 2022, owing to the revision of the IFRS 9 impairment model parameters, and as some large corporate exposures were reclassified into Stage 2 category. As a result of the provision for impairment, the own provision coverage of Stage 1, Stage 2, and Stage 3 loans all improved meaningfully y-o-y. The ratio of Stage 3 loans sank by 0.3 pp, to 2.5% y-o-y. The y-o-y decline in other risk costs was driven by a high base due to the high provision for litigation in 2021. The performing (Stage 1+2) loan book grew by 10% y-o-y, driven by the housing loan programme that was supported by a marketing campaign, strong cash loan disbursements, and growth in loans to large corporations. The deposit book grew by an FX-adjusted 15% y-o-y, mainly due to retail demand deposits and large corporate deposits; the growth rate was above market average, particularly in the large corporate segment. The bank’s net loan/deposit ratio declined; it stood at 127% at the end of December. INTEGRATED ANNUAL REPORT 2022 52 OTP BANK BUSINESS REPORT 2022 (CONSOLIDATED) SKB BANKA (SLOVENIA) Performance of SKB Banka (Slovenia): Main components of P&L account Adjusted profit after tax Income tax Profit before income tax Operating profit Total income Net interest income Net fees and commissions Other net non-interest income Operating expenses Total provisions Provision for impairment on loan losses Other provision Main components of balance sheet closing balances Total assets Gross customer loans Gross customer loans (FX-adjusted) Stage 1+2 customer loans (FX-adjusted) Retail loans Corporate loans Leasing Allowances for possible loan losses Allowances for possible loan losses (FX-adjusted) Deposits from customers Deposits from customers (FX-adjusted) Retail deposits Corporate deposits Liabilities to credit institutions Total shareholders' equity Loan Quality Stage 1 loan volume under IFRS 9 (in HUF million) Stage 1 loans under IFRS 9/gross customer loans Own coverage of Stage 1 loans under IFRS 9 Stage 2 loan volume under IFRS 9 (in HUF million) Stage 2 loans under IFRS 9/gross customer loans Own coverage of Stage 2 loans under IFRS 9 Stage 3 loan volume under IFRS 9 (in HUF million) Stage 3 loans under IFRS 9/gross customer loans Own coverage of Stage 3 loans under IFRS 9 Provision for impairment on loan losses/average gross loans 90+ days past due loan volume (in HUF million) 90+ days past due loans/gross customer loans Performance Indicators ROA ROE Total income margin Net interest margin Operating costs / Average assets Cost/income ratio Net loans to deposits (FX-adjusted) HUF/EUR (closing) HUF/EUR (average) FX rates 2021 HUF million 16,822 (3,838) 20,660 19,595 42,354 27,673 13,258 1,423 (22,759) 1,065 1,819 (754) 2021 1,433,206 984,605 1,068,248 1,054,104 516,522 356,531 181,051 (16,271) (17,658) 1,213,698 1,318,022 972,768 345,254 15,565 179,515 2021 846,646 86.0% 0.3% 124,932 12.7% 5.0% 13,027 1.3% 56.1% (0.20)% 4,353 0.4% 2021 1.2% 10.0% 3.13% 2.04% 1.68% 53.7% 80% 2021 HUF 369.0 358.5 2022 HUF million 23,860 (5,710) 29,570 24,046 51,403 33,688 15,416 2,299 (27,357) 5,523 7,048 (1,525) 2022 1,790,944 1,204,641 1,204,641 1,190,453 552,741 451,536 186,177 (14,637) (14,637) 1,466,625 1,466,625 1,053,881 412,744 68,172 194,843 2022 1,062,588 88.2% 0.2% 127,866 10.6% 2.4% 14,188 1.2% 68.4% (0.61)% 5,831 0.5% 2022 1.5% 12.8% 3.25% 2.13% 1.73% 53.2% 81% 2022 HUF 400.3 384.9 Change % 42 49 43 23 21 22 16 61 20 419 287 102 % 25 22 13 13 7 27 3 (10) (17) 21 11 8 20 338 9 %/pps 26 2.2 (0.1) 2 (2.1) (2.6) 9 (0.1) 12.2 (0.42) 34 0.0 pps 0.3 2.8 0.12 0.09 0.05 (0.5) 1 Change % 8 7 On 31 January 2023, Slovenia’s competition authority approved the purchase of Nova KBM d.d., and the financial closure of the transaction was completed on 6 February 2023. The balance sheet and P/L figures of the purchased bank will be included into OTP Group’s consolidated figures from the first quarter of 2023. OTP Group's Slovenian subsidiary generated almost HUF 24 billion profit after tax in 2022 (+42% y-o-y). The profit improved chiefly as a result of a 23% growth in operating profit, and the fivefold jump in positive risk costs. ROE improved by 2.8 pps, to 12.8% y-o-y. What distorts the profit dynamic is that the HUF’s twelve-month average exchange rate weakened by 7% y-o-y versus the EUR. INTEGRATED ANNUAL REPORT 2022 53 OTP BANK BUSINESS REPORT 2022 (CONSOLIDATED) The improvement in the operating profit stemmed from the 21% increase in total income; operating expenses grew slower than that (+20% y-o-y). The rise in net interest income (+11% in EUR) was driven by the combined effect of performing loan volumes’ dynamic growth and the improving net interest margin (+9 bps y-o-y). The ECB started to raise its interest rates, which benefited interests on the asset side. The 2.13% annual net interest margin is still above the average of the banking sector. The 16% y-o-y increase in net fees and commissions (7% in EUR) largely stemmed from the improvement in transaction fee income (transfers, ATMs, cards). Fee income from transactions with securities have also risen. However, charging retail and corporate customers above a certain deposit threshold, a practice launched in 2021, ended in August. The jump in other income can be mainly attributable to the refund on an insurance cooperation. The annual volume of positive risk costs exceeded HUF 5.5 billion. First, the provisions set aside during COVID were released; second, based on the forward-looking IFRS 9 model, the probability of defaults, calculated during the maturity, have sharply reduced, which has led to the release of roughly EUR 11 million provision in the third quarter. The ECB began monetary tightening in July 2022, raising the benchmark interest rate to 2.5%. Operating expenses have grown by 20% y-o-y (10% in EUR); within that, personnel expenses rose slower, while administrative and amortization costs increased by more than 10%. The bank’s annual cost/income ratio sank to 53.2% (-0.5 pp), one of the lowest levels in this sector. The quality of the portfolio remained stable: the ratio of Stage 3 loans inched up ( -0.1 pp), while the Stage 2 ratio dropped by 2.1% y-o-y. The own provision coverage of Stage 3 loans exceeded 68%, which is consistent with 12.2% y-o-y growth. The FX-adjusted volume of Stage 1+2 loans expanded by 13% y-o-y. Corporate loan growth was outstanding (+27% y-o-y), while mortgages rose by 9% y-o-y in the retail segment. Corporate loan placement growth was mostly linked to financing working capital, and to a lesser extent to investment loans. The Bank’s market share has trivially dropped in cash and mortgage loans, but improved in the corporate segm ent, going beyond 10%. The net loan/deposit ratio raised to 81% (+1 pp y-o-y). Similarly to loans, the FX-adjusted annual deposit growth (+11%) was also faster in the corporate segment (+20% y-o-y). Making use of the rising interest rate level, the excess liquidity was placed on the interbank market and at the central bank. In June and September, the Bank received EUR 30 million and EUR 50 million subordinated loan capital from OTP Bank, and SKB issued EUR 170 million worth of MREL-eligible bonds in December. INTEGRATED ANNUAL REPORT 2022 54 OTP BANK BUSINESS REPORT 2022 (CONSOLIDATED) OTP BANK ROMANIA Performance of OTP Bank Romania: Main components of P&L account Adjusted profit after tax Income tax Profit before income tax Operating profit Total income Net interest income Net fees and commissions Other net non-interest income Operating expenses Total provisions Provision for impairment on loan losses Other provision Main components of balance sheet closing balances Total assets Gross customer loans Gross customer loans (FX-adjusted) Stage 1+2 customer loans (FX-adjusted) Retail loans Corporate loans Leasing Allowances for possible loan losses Allowances for possible loan losses (FX-adjusted) Deposits from customers Deposits from customers (FX-adjusted) Retail deposits Corporate deposits Liabilities to credit institutions Total shareholders' equity Loan Quality Stage 1 loan volume under IFRS 9 (in HUF million) Stage 1 loans under IFRS 9/gross customer loans Own coverage of Stage 1 loans under IFRS 9 Stage 2 loan volume under IFRS 9 (in HUF million) Stage 2 loans under IFRS 9/gross customer loans Own coverage of Stage 2 loans under IFRS 9 Stage 3 loan volume under IFRS 9 (in HUF million) Stage 3 loans under IFRS 9/gross customer loans Own coverage of Stage 3 loans under IFRS 9 Provision for impairment on loan losses/average gross loans 90+ days past due loan volume (in HUF million) 90+ days past due loans/gross customer loans Performance Indicators ROA ROE Total income margin Net interest margin Operating costs / Average assets Cost/income ratio Net loans to deposits (FX-adjusted) HUF/RON (closing) HUF/RON (average) FX rates 2021 HUF million 4,253 (1,444) 5,697 8,937 46,699 36,270 4,143 6,285 (37,762) (3,240) (6,821) 3,581 2021 1,438,484 1,035,400 1,124,925 1,060,750 544,295 465,996 50,460 (54,780) (59,721) 830,717 899,056 474,446 424,611 402,553 164,914 2021 826,518 79.8% 1.0% 150,038 14.5% 8.4% 58,844 5.7% 57.5% 0.74% 35,921 3.5% 2021 0.3% 3.0% 3.75% 2.92% 3.04% 80.9% 118% 2021 HUF 74.6 72.8 2022 HUF million 3,071 (649) 3,720 17,384 62,596 53,560 4,743 4,293 (45,212) (13,663) (11,094) (2,569) 2022 1,687,581 1,228,254 1,228,254 1,163,986 565,119 535,591 63,276 (62,442) (62,442) 998,452 998,452 593,046 405,406 446,641 181,206 2022 990,307 80.6% 1.1% 173,679 14.1% 9.6% 64,268 5.2% 54.1% 0.93% 37,091 3.0% 2022 0.2% 1.8% 3.86% 3.31% 2.79% 72.2% 117% 2022 HUF 80.9 79.4 Change % (28) (55) (35) 95 34 48 14 (32) 20 322 63 % 17 19 9 10 4 15 25 14 5 20 11 25 (5) 11 10 %/pps 20 0.8 0.1 16 (0.4) 1.2 9 (0.5) (3.4) 0.19 3 (0.4) pps (0.2) (1.3) 0.11 0.39 (0.24) (8.6) (2) Change % 8 9 In 2022 OTP Bank Romania generated HUF 3.1 billion profit after tax. In a positive development, operating profit nearly doubled y-o-y, but due to the higher risk cost level, profit after rax dropped by 28% y-o-y (-40% in local currency). Operating profit increased by 76% in local currency, as a result of 23% y-o-y surge in total income and 10% higher operating expenses. In full year 2022, risk costs nearly tripled in local currency, owing to a 50% increase in credit risk costs as well as a rise in other risk costs, partly related to a base effect: in 2021 loan loss provisions related to one-offs were written back, totalling HUF 3.6 billion, but at the beginning of 2022, one-off provisions were put aside in connection with an operational risk event. INTEGRATED ANNUAL REPORT 2022 55 OTP BANK BUSINESS REPORT 2022 (CONSOLIDATED) In 2022, other income declined, while net fees and commissions increased by 5% in local currency, and net interest income jumped by 35%. The latter benefited from an increase in average performing loan volume, and from the 39 bps y-o-y improvement in net interest margin. The improvement in the interest margin stemmed from the rising trend in benchmark interest rates (primarily the three-month interbank lending rate for corporate loans and the IRCC benchmark index for retail mortgages) throughout the year, which was only partly offset by an increase in borrowing costs. In 2022, operating expenses grew by 10% in local currency. Regarding the higher cost/income ratio, which was typical in recent years, partly linked to the initial higher costs of the growth strategy, positive signs have appeared in full year 2022: the ratio improved by 8.6 pps, to 72.2% y-o-y. As to business activity, retail product placements fell by more than 20% in full year 2022 in the rising interest rate environment, while disbursements in the corporate loan and leasing segments increased by more than 10% year-on-year. Early repayments were on the rise, particularly for mortgage loans, while disbursements were decreasing. Accordingly, the FX-adjusted annual growth of performing retail loans (+4%) was slower than that of the MSE, corporate, and leasing segments (+11%, +15%, and 25% y-o-y, respectively). In 2022, deposits from customers grew fin FX-adjusted terms by 11%; while corporate deposits contracted by 5%, household deposits increased by 28% y-o-y. The net loan/deposit ratio sank to 117%. As to loan quality, the ratio of Stage 3 loans within the full portfolio sank by half a percentage point, to 5.2% y-o-y, while their own provision coverage declined by 3.4 pps y-o-y (2022: 59.7%). The ratio of Stage 2 loans prints a similar pattern: it slipped by 0.4 pp, to 14.1% y-o-y. In 2022, a total of HUF 10 billion worth of non-performing loans were sold. INTEGRATED ANNUAL REPORT 2022 56 OTP BANK BUSINESS REPORT 2022 (CONSOLIDATED) OTP BANK UKRAINE Performance of OTP Bank Ukraine: Main components of P&L account Adjusted profit after tax Income tax Profit before income tax Operating profit Total income Net interest income Net fees and commissions Other net non-interest income Operating expenses Total provisions Provision for impairment on loan losses Other provision Main components of balance sheet closing balances in HUF million Total assets Gross customer loans Gross customer loans (FX-adjusted) Stage 1+2 customer loans (FX-adjusted) Retail loans Corporate loans Leasing Allowances for possible loan losses Allowances for possible loan losses (FX-adjusted) Deposits from customers Deposits from customers (FX-adjusted) Retail deposits Corporate deposits Liabilities to credit institutions Total shareholders' equity Loan Quality Stage 1 loan volume under IFRS 9 (in HUF million) Stage 1 loans under IFRS 9/gross customer loans Own coverage of Stage 1 loans under IFRS 9 Stage 2 loan volume under IFRS 9 (in HUF million) Stage 2 loans under IFRS 9/gross customer loans Own coverage of Stage 2 loans under IFRS 9 Stage 3 loan volume under IFRS 9 (in HUF million) Stage 3 loans under IFRS 9/gross customer loans Own coverage of Stage 3 loans under IFRS 9 Provision for impairment on loan losses/average gross loans 90+ days past due loan volume (in HUF million) 90+ days past due loans/gross customer loans Performance Indicators ROA ROE Total income margin Net interest margin Operating costs / Average assets Cost/income ratio Net loans to deposits (FX-adjusted) HUF/UAH (closing) HUF/UAH (average) FX rates 2021 HUF million 39,024 (8,242) 47,266 54,760 83,567 62,051 14,494 7,022 (28,806) (7,494) (5,827) (1,667) 2021 983,557 662,173 633,775 594,212 99,019 328,662 166,531 (47,830) (45,370) 671,002 645,296 273,594 371,702 115,714 159,756 2021 576,876 87.1% 1.9% 43,707 6.6% 18.5% 41,590 6.3% 69.6% 1.09% 21,914 3.3% 2021 4.7% 28.8% 10.06% 7.47% 3.5% 34.5% 91% 2021 HUF 11.9 11.1 2022 HUF million (15,922) (2,718) (13,204) 79,863 110,805 90,007 12,673 8,125 (30,943) (93,067) (90,836) (2,231) 2022 1,048,713 529,644 529,644 433,520 48,530 264,425 120,565 (115,754) (115,754) 783,009 783,009 302,960 480,049 108,678 122,493 2022 219,078 41.4% 2.1% 214,442 40.5% 18.1% 96,124 18.1% 75.3% 14.01% 42,776 8.1% 2022 (1.6)% (12.4)% 10.92% 8.87% 3.0% 27.9% 53% 2022 HUF 10.2 11.5 Change % (141) (67) (128) 46 33 45 (13) 16 7 34 % 7 (20) (16) (27) (51) (20) (28) 142 155 17 21 11 29 (6) (23) %/pps -62 (45.8) 0.2 391 33.9 (0.4) 131 11.9 5.7 12.92 95 4.8 pps (6.3) (41.1) 0.86 1.40 (0.4) (6.5) (38) Change % (14) 3 OTP Bank Ukraine's financial figures in HUF terms were affected by the UAH/HUF exchange rate’s moves: In 2022, the UAH’s average exchange rate appreciated by 3% y-o-y. The hryvnia’s closing exchange rate vs the HUF depreciated by 14% y-o-y. Therefore, the balance sheet and P&L dynamics in HUF terms differ from the ones calculated in local currency. OTP Bank Ukraine realized HUF 16 billion loss in 2022, mainly owing to provisions for loan losses, but its operating profit improved, driven by an increase in interest income. Operating profit was 46% higher (+42% in UAH) than in the base period, chiefly as a result of g rowing net interest income (+42% in UAH). INTEGRATED ANNUAL REPORT 2022 57 OTP BANK BUSINESS REPORT 2022 (CONSOLIDATED) Net interest margin strengthened on annual basis by +1.4 pps, mostly as a result of the rising average interest level of financial assets and large corporate loans. Net fees and commissions declined by 13% y-o-y in HUF, mainly as the use of cards and accounts dropped, and foreign exchange transactions declined as business activity decreased. Business activity picked up in the second half of the year, causing higher spending, card usage, and corporate foreign exchange transaction. The y-o-y increase in other income was mostly driven by foreign exchange conversion gains. Operating expenses rose by 5% in UAH, mostly driven by an increase in personnel costs. As a result o f strict cost management, the cost/income ratio remained the lowest among group members, it was 28% in 2022. In 2022, risk costs totalled HUF 93 billion, mainly due to macro parameter revision and because of the reclassification of certain exposures to Stage 2 or Stage 3 as the portfolio deteriorated. The Stage 2 ratio grew by 33.9 pps, to 40.5% y-o-y, the own coverage of Stage 2 loans stood at 18.1% at the end of the year. The Stage 3 ratio grew by 12 pps y-o-y to 18.1%, with 75% own provision coverage (5.7 pps y-o-y). In 2022, the ratio of provisions to gross loans increased to 21.9% (from 7.2% in 2021). The bank stopped mortgage lending in February, while POS lending, which had fallen to a fraction since February improved in the second half of the year; disbursements started with limited volumes, and pricing reflecting the high interest rate environment. The number of users of the bank's digital application, OTP Credit, and online loan sales began to increase again in the fourth quarter after stagnating in the previous months. The performing retail (Stage 1+2) loan volume fell by 51% y-o-y (FX-adjusted). New corporate lending is mostly limited to the refinancing of existing credit lines. Corporate loan volumes contracted by 20% y-o-y, and the leasing portfolio shrank by 28% (FX-adjusted). • deposits. The deposit book grew by 21% y-o-y FX-adjusted, chiefly boosted by the increase of large corporate OTP Bank Ukraine’s capital position is stable; its capital adequacy ratio stood at 27.7% at the end of 2022; the CET1 ratio is at 17.6% (the regulatory minimum is 7.0%). INTEGRATED ANNUAL REPORT 2022 58 OTP BANK BUSINESS REPORT 2022 (CONSOLIDATED) OTP BANK RUSSIA Performance of OTP Bank Russia Main components of P&L account Adjusted profit after tax Income tax Profit before income tax Operating profit Total income Net interest income Net fees and commissions Other net non-interest income Operating expenses Total provisions Provision for impairment on loan losses Other provision Main components of balance sheet closing balances Total assets Gross customer loans Gross customer loans (FX-adjusted) Stage 1+2 customer loans (FX-adjusted) Retail loans Corporate loans Allowances for possible loan losses Allowances for possible loan losses (FX-adjusted) Deposits from customers Deposits from customers (FX-adjusted) Retail deposits Corporate deposits Liabilities to credit institutions Total shareholders' equity Loan Quality Stage 1 loan volume under IFRS 9 (in HUF million) Stage 1 loans under IFRS 9/gross customer loans Own coverage of Stage 1 loans under IFRS 9 Stage 2 loan volume under IFRS 9 (in HUF million) Stage 2 loans under IFRS 9/gross customer loans Own coverage of Stage 2 loans under IFRS 9 Stage 3 loan volume under IFRS 9 (in HUF million) Stage 3 loans under IFRS 9/gross customer loans Own coverage of Stage 3 loans under IFRS 9 Provision for impairment on loan losses/average gross loans 90+ days past due loan volume (in HUF million) 90+ days past due loans/gross customer loans Performance Indicators ROA ROE Total income margin Net interest margin Operating costs / Average assets Cost/income ratio Net loans to deposits (FX-adjusted) HUF/RUB (closing) HUF/RUB (average) FX rates 2021 HUF million 37,624 (9,690) 47,313 62,368 118,158 91,364 25,728 1,066 (55,790) (15,055) (13,075) (1,979) 2021 799,965 753,373 891,162 789,349 642,680 146,669 (131,878) (155,970) 411,633 484,763 362,735 122,028 85,485 240,724 2021 576,404 76.5% 3.8% 90,944 12.1% 31.1% 86,025 11.4% 95.1% 2.05% 87,550 11.6% 2021 5.4% 18.2% 17.02% 13.16% 8.0% 47.2% 152% 2021 HUF 4.4 4.1 2022 HUF million 42,548 (3,632) 46,179 98,137 178,494 118,004 35,251 25,239 (80,357) (51,958) (51,046) (911) 2022 1,029,721 784,958 784,958 661,999 624,932 37,067 (173,105) (173,105) 576,865 576,865 341,554 235,311 49,774 306,304 2022 570,949 72.7% 5.1% 91,050 11.6% 31.5% 122,959 15.7% 93.6% 5.85% 122,953 15.7% 2022 3.9% 14.1% 16.23% 10.73% 7.3% 45.0% 106% 2022 HUF 5.2 5.7 Change % 13 (63) (2) 57 51 29 37 44 245 290 (54) % 29 4 (12) (16) (3) (75) 31 11 40 19 (6) 93 (42) 27 %/pps (1) (3.8) 1.3 0 (0.5) 0.4 43 4.2 (1.4) 3.81 40 4.0 pps (1.6) (4.1) (0.79) (2.43) (0.7) (2.2) (46) Change % 18 38 OTP Bank Russia's financial figures in HUF terms were strongly affected by the forint/rouble exchange rate's moves: the RUB’s closing exchange rate appreciated by 18% y-o-y. The average exchange rate strengthened 38% y-o-y. Therefore, changes expressed in local currency provide a more accurate picture of balance sheet and P&L developments. OTP Bank Russia posted HUF 42.5 billion profit in 2022, 13% more than in the base period. The result in rouble was 57% less than in the previous year. The profit was fundamentally boosted by the growth of the operating profit, which offset the increase of risk costs. In local currency, the 2022 annual operating profit grew by 11% in comparison with the previous year. In rouble, total income increased by 8% y-o-y; within that, net interest income, as well as net fees and INTEGRATED ANNUAL REPORT 2022 59 OTP BANK BUSINESS REPORT 2022 (CONSOLIDATED) commissions declined, while other income grew materially. Net interest income dropped by 6% in rouble last year, it was largely shaped by the shrinking interest income on the declining average volume, and the increased funding costs in a temporarily rising interest rate environment. The net interest margin was at 10.7%, dropping by 2.4 pps y-o-y, mostly as lending activity dropped back and the excess liquidity was placed at lower yields. Net fee and commission income declined by 2% y-o-y in rouble (improved by 37% in HUF), mainly owing to the fall in loan disbursements, which was partly offset by the stronger income from foreign transfers. Operating expenses rose by 6% in rouble (by +44% in HUF), mostly owing to rising personnel costs, telecommunications expenses, and costs related to IT developments. Nevertheless, cost efficiency indicators have improved, the cost/income ratio was 45% in 2022 (-2.2 pps y-o-y). During the year, digital developments aimed at increasing the proportion of online loan disbursements played an important role in this trend. At the end of the year, 65% of the new personal loan placements took place via digital channels. Online penetration among active customers exceeded 78%. In 2022, total risk costs amounted to HUF 52 billion, mainly due to increased loan loss pro visions as a result of unfavourable macroeconomic effects and negative forward-looking expectations. The Stage 3 ratio rose by 4.2 pps y-o-y, mainly driven by the large corporate segment. On an annual basis, the performing (Stage 1+2) loan stock decreased by 16% adjusted for exchange rates, primarily due to the effect of the large corporate loan stock shrinking by 75% as a result of the cessation of active corporate lending. Performing retail loan volumes shank by 3% y-o-y (FX-adjusted). Deposits from customers grew by 19% y-o-y (FX-adjusted), boosted by the large corporate segment’s 93% increase, while retail deposit volumes shrank (-6%). The net loan/deposit ratio fell by 46 pps y-o-y, to 106%. In the fourth quarter, the Russian operation repaid its expiring intragroup liabilities, so the existing gross intragroup financing was reduced to zero. At the end of the year, only the intragroup subordinated debt due in 2031 remained in the amount of HUF 10 billion. The Bank’s capital adequacy ratios remained st eadily above the regulatory minimum levels. The Bank’s CAR stood at 17.9% at the end of December (vs the regulatory minimum: 10.5%), its CET1 ratio was 15.3% (vs the regulatory minimum: 7.0%). INTEGRATED ANNUAL REPORT 2022 60 OTP BANK BUSINESS REPORT 2022 (CONSOLIDATED) CKB GROUP (MONTENEGRO) Performance of CKB Group: Main components of P&L account Adjusted profit after tax Income tax Profit before income tax Operating profit Total income Net interest income Net fees and commissions Other net non-interest income Operating expenses Total provisions Provision for impairment on loan losses Other provision Main components of balance sheet closing balances Total assets Gross customer loans Gross customer loans (FX-adjusted) Stage 1+2 customer loans (FX-adjusted) Retail loans Corporate loans Allowances for possible loan losses Allowances for possible loan losses (FX-adjusted) Deposits from customers Deposits from customers (FX-adjusted) Retail deposits Corporate deposits Liabilities to credit institutions Total shareholders' equity Loan Quality Stage 1 loan volume under IFRS 9 (in HUF million) Stage 1 loans under IFRS 9/gross customer loans Own coverage of Stage 1 loans under IFRS 9 Stage 2 loan volume under IFRS 9 (in HUF million) Stage 2 loans under IFRS 9/gross customer loans Own coverage of Stage 2 loans under IFRS 9 Stage 3 loan volume under IFRS 9 (in HUF million) Stage 3 loans under IFRS 9/gross customer loans Own coverage of Stage 3 loans under IFRS 9 Provision for impairment on loan losses/average gross loans 90+ days past due loan volume (in HUF million) 90+ days past due loans/gross customer loans Performance Indicators ROA ROE Total income margin Net interest margin Operating costs / Average assets Cost/income ratio Net loans to deposits (FX-adjusted) HUF/EUR (closing) HUF/EUR (average) FX rates 2021 HUF million 4,140 (817) 4,957 10,240 22,046 16,553 4,880 613 (11,805) (5,283) 647 (5,930) 2022 HUF million 9,791 (2,184) 11,975 15,133 28,816 20,832 7,106 878 (13,683) (3,158) 639 (3,797) 2021 513,522 366,369 397,396 369,636 175,739 193,897 (23,504) (25,495) 386,572 420,137 255,905 164,232 19,698 82,029 2021 280,910 76.7% 1.0% 59,866 16.3% 6.5% 25,593 7.0% 66.0% (0.18)% 16,472 4.5% 2021 0.9% 5.2% 4.62% 3.47% 2.48% 53.5% 89% 2021 HUF 369.0 358.5 2022 664,395 447,921 447,921 425,934 193,907 232,027 (21,893) (21,893) 524,479 524,479 289,242 235,237 12,443 99,131 2022 389,640 87.0% 1.2% 36,294 8.1% 8.9% 21,987 4.9% 64.4% (0.15)% 13,330 3.0% 2022 1.6% 10.9% 4.84% 3.50% 2.30% 47.5% 81% 2022 HUF 400.3 391.3 Change % 137 167 142 48 31 26 46 43 16 (40) (1) (36) % 29 22 13 15 10 20 (7) (14) 36 25 13 43 (37) 21 %/pps 39 10.3 0,2 (39) (8,2) 2.4 (14) (2,1) (1,7) 0,03 (19) (1,5) pps 0.8 5.7 0.21 0.02 (0.18) (6.1) (7) Change % 8 9 In 2022, the Montenegrin CKB Group generated HUF 9.8 billion adjusted profit after tax, twice as much as in the base period in local currency. The improvement in the annual result stemmed from 34% higher operating profit and 38% fall in risk costs. The bank’s cost efficiency is steadily improving, the cost/income ratio dropped by 6.1 pps, to 47.5% y-o-y in 2022, and now it is better than the Group’s average again, for the first time since 2008. In full-year 2022, core banking revenues were favourable, supported by the stronger business activity. Total income expanded by 19% in local currency, owing to a 15% surge in net interest income, as well as a 33% jump in net fees and commissions. The increase in business turnover had a benign effect on income, while the annual net interest margin upped by two basis points. Operating expenses rose by 6% y -o-y in EUR; more than half of this increase came from the annual growth in fees to supervisory bodies. INTEGRATED ANNUAL REPORT 2022 61 OTP BANK BUSINESS REPORT 2022 (CONSOLIDATED) In 2022, total risk cost amounted to HUF 3.2 billion (-40% y-o-y). Within that, provisions for impairment on loan losses increased the profit, partly because of the revision of the impairment model parameters. Other risk cost declined by 36% Performing (Stage 1+2) loans rose by 15% y-o-y (FX-adjusted). In 2022, newly disbursed corporate loans doubled, while mortgage loans jumped by 61%, and cash loans surged by 55%. The ratio of Stage 3 loans fell to 4.9% (-2.1 pps y-o-y). One reason for the improvement is that HUF 4.8 billion worth of non-performing loans were sold in 2022. The own provision coverage of Stage 3 loans stood at 64.4% at the end of the year (-1.7 pps y-o-y). The FX-adjusted deposit book expanded by 25% y-o-y. The net loan/deposit ratio stood at 81% at the end of the year (-7 pps y-o-y). INTEGRATED ANNUAL REPORT 2022 62 OTP BANK BUSINESS REPORT 2022 (CONSOLIDATED) OTP BANK ALBANIA Performance of OTP Bank Albania: Main components of P&L account Adjusted profit after tax Income tax Profit before income tax Operating profit Total income Net interest income Net fees and commissions Other net non-interest income Operating expenses Total provisions Provision for impairment on loan losses Other provision Main components of balance sheet closing balances Total assets Gross customer loans Gross customer loans (FX-adjusted) Stage 1+2 customer loans (FX-adjusted) Retail loans Corporate loans Leasing Allowances for possible loan losses Allowances for possible loan losses (FX-adjusted) Deposits from customers Deposits from customers (FX-adjusted) Retail deposits Corporate deposits Liabilities to credit institutions Total shareholders' equity Loan Quality Stage 1 loan volume under IFRS 9 (in HUF million) Stage 1 loans under IFRS 9/gross customer loans Own coverage of Stage 1 loans under IFRS 9 Stage 2 loan volume under IFRS 9 (in HUF million) Stage 2 loans under IFRS 9/gross customer loans Own coverage of Stage 2 loans under IFRS 9 Stage 3 loan volume under IFRS 9 (in HUF million) Stage 3 loans under IFRS 9/gross customer loans Own coverage of Stage 3 loans under IFRS 9 Provision for impairment on loan losses/average gross loans 90+ days past due loan volume (in HUF million) 90+ days past due loans/gross customer loans Performance Indicators ROA ROE Total income margin Net interest margin Operating costs / Average assets Cost/income ratio Net loans to deposits (FX-adjusted) HUF/ALL (closing) HUF/ALL (average) FX rates 2021 HUF million 5,522 (986) 6,508 7,213 13,398 10,619 1,843 936 (6,186) (705) (880) 175 2022 HUF million 10,175 (2,013) 12,188 9,335 20,232 16,927 3,067 238 (10,896) 2,852 2,505 347 2021 350,848 219,890 244,973 236,959 94,768 138,049 4,143 (10,096) (11,227) 251,270 280,600 234,809 45,790 53,257 35,134 2021 191,308 87.0% 1.2% 21,391 9.7% 11.4% 7,190 3.3% 73.3% 0.46% 3,624 1.6% 2021 1.8% 17.6% 4.43% 3.51% 2.0% 46.2% 83% 2021 HUF 3.1 2.9 2022 635,364 370,875 370,875 352,632 156,789 191,676 4,167 (16,208) (16,208) 516,668 516,668 448,065 68,603 30,279 60,827 2022 318,215 85.8% 1.0% 34,417 9.3% 9.4% 18,243 4.9% 54.4% (0.83%) 11,050 3.0% 2022 2.0% 21.1% 4.07% 3.40% 2.2% 53.9% 69% 2022 HUF 3.5 3.3 Change % 84 104 87 29 51 59 66 (75) 76 98 % 81 69 51 49 65 39 1 61 44 106 84 91 50 (43) 73 %/pps 66 (1.2) (0.3) 61 (0.4) (2.1) 154 1.6 (18.8) (1.30) 205 1.3 pps 0.2 3.5 (0.37) (0.11) 0.1 7.7 (15) Change % 15 13 In accordance with the purchase agreement signed by and between OTP Bank and Alpha International Holdings Single Member S.A. on 6 December 2021, the transaction’s financial closure was completed on 18 July 2022. As a result, OTP Bank became the 100% owner of Alpha Bank Albania SH.A., Alpha Bank Group’s Albanian subsidiary. The consolidated financial statements include the acquired bank’s volumes from July, while the profit contribution is consolidated into the Group’s P&L account starting from August only. On 1 December 2022, Albania’s Court of Registration registered the merger of Alpha Bank Albania SH.A. and Banka OTP Albania SHA. INTEGRATED ANNUAL REPORT 2022 63 OTP BANK BUSINESS REPORT 2022 (CONSOLIDATED) The Albanian profit and loss account was adjusted for the one-off items directly related to the acquisition; they are presented at consolidated level among the adjustment items. The balance sheet items were not adjusted for these effects. In full year 2022, OTP Bank Albania generated HUF 10.2 billion profit after tax (84% in HUF y-o-y; +64% in local currency), which includes the result of the newly consolidated bank, starting from August. This is consistent with 21.1% ROE, the best return on equity in OTP Group. Thanks to the acquisition, the market share of OTP’s Albanian operation by net loan jumped to 14.6% by the end of December 2022, from 10.6% at the end of December 2021. This ranks it third, up from the fourth place in the market ranking of banks. In terms of total assets, OTP confirmed its fifth place with 9.5% market share. On 1 December 2022, Alpha Bank Albania merged into OTP Bank Albania, and the integration began. Its first results were realized in the fourth quarter: the total network in Albania has contracted by 15 units (-21%), while the number of employees dropped by 64 people (-8%) q-o-q. In local currency, operating profit grew by 15% y-o-y. Net interest income grew 28% y-o-y in local currency, net fees and commissions increased by 45%, and operating expenses rose by 53%. Annual net interest margin was 3.4%. Risk costs amounted to a positive figure, HUF 2.9 billion, as risk parameters were revised at both banks in the fourth quarter, which resulted in risk cost releases. At the end of 2022, the ratio of Stage 3 loans was 4.9%, whereas the own provision coverage of Stage 3 loans was 54.4%. The reason for the y-o-y decline was that during the consolidation of the newly acquired bank, Stage 3 volumes were netted with the related provisions. Due largely to acquisitions and to a lesser extent to organic growth, the performing (Stage 1+2) loan book increased by 49% y-o-y, while the stock of deposits grew by 84% y-o-y. INTEGRATED ANNUAL REPORT 2022 64 OTP BANK BUSINESS REPORT 2022 (CONSOLIDATED) OTB BANK MOLDOVA Performance of OTB Bank Moldova: Main components of P&L account Adjusted profit after tax Income tax Profit before income tax Operating profit Total income Net interest income Net fees and commissions Other net non-interest income Operating expenses Total provisions Provision for impairment on loan losses Other provision Main components of balance sheet closing balances Total assets Gross customer loans Gross customer loans (FX-adjusted) Stage 1+2 customer loans (FX-adjusted) Retail loans Corporate loans Leasing Allowances for possible loan losses Allowances for possible loan losses (FX-adjusted) Deposits from customers Deposits from customers (FX-adjusted) Retail deposits Corporate deposits Liabilities to credit institutions Total shareholders' equity Loan Quality Stage 1 loan volume under IFRS 9 (in HUF million) Stage 1 loans under IFRS 9/gross customer loans Own coverage of Stage 1 loans under IFRS 9 Stage 2 loan volume under IFRS 9 (in HUF million) Stage 2 loans under IFRS 9/gross customer loans Own coverage of Stage 2 loans under IFRS 9 Stage 3 loan volume under IFRS 9 (in HUF million) Stage 3 loans under IFRS 9/gross customer loans Own coverage of Stage 3 loans under IFRS 9 Provision for impairment on loan losses/average gross loans 90+ days past due loan volume (in HUF million) 90+ days past due loans/gross customer loans Performance Indicators ROA ROE Total income margin Net interest margin Operating costs / Average assets Cost/income ratio Net loans to deposits (FX-adjusted) HUF/MDL (closing) HUF/MDL (average) FX rates 2021 HUF million 5,858 (802) 6,660 7,835 15,271 9,698 2,344 3,230 (7,437) (1,175) (663) (512) 2022 HUF million 9,403 (1,385) 10,788 17,551 27,830 19,172 2,624 6,034 (10,279) (6,763) (5,895) (868) 2021 310,511 166,573 179,402 176,102 96,830 75,132 4,140 (5,020) (5,415) 247,610 268,754 173,744 95,010 15,886 42,701 2021 153,157 91.9% 1.3% 10,368 6.2% 13.6% 3,048 1.8% 54.3% 0.46% 2,164 1.3% 2021 2.2% 15.2% 5.86% 3.72% 2.85% 48.7% 65% 2021 HUF 18.4 17.2 2022 365,658 171,412 171,412 166,679 83,388 78,333 4,958 (11,177) (11,177) 264,031 264,031 177,022 87,009 42,083 53,430 2022 139,227 81.2% 2.3% 27,452 16.0% 18.3% 4,733 2.8% 61.3% 3.23% 3,158 1.8% 2022 2.7% 19.3% 8.05% 5.55% 2.97% 36.9% 61% 2022 HUF 19.6 19.7 Change % 61 73 62 124 82 98 12 87 38 476 789 70 % 18 3 (4) (5) (14) 4 20 123 106 7 (2) 2 (8) 165 25 %/pps -9 (10.7) 1.1 165 9.8 4.7 55 0.9 7.0 2.77 46 0.5 pps 0.5 4.1 2.19 1.83 0.12 (11.8) -4 Change % 7 15 OTP Bank Moldova generated HUF 9.4 billion profit after tax in 2022, which presents a 61% y-o-y growth. This was mainly driven by the 124% y-o-y increase of the operating profit, that offset the higher risk costs. In 2022, total income exceeded that of the base period by 82%, chiefly because net interest income has doubled (+70% in local currency). In the rising interest rate environment (the central bank base rate grew from 6.5% at the beginning of the year to 21.5% by August, and then decreased to 20% in December), variable interest rate assets followed the upward trend. Furthermore, the net interest income was significantly supported by the interest income achieved on the mandatory reserve deposited with the central bank. The required reserve ratio was 40% until December 5, 2022, and the interest rate was 19.5% (after December 5, the required reserve ratio was reduced to 37%, the interest rate to 18%). The annual net interest margin improved by 1.83 pps y-o-y, to 5.55%. INTEGRATED ANNUAL REPORT 2022 65 OTP BANK BUSINESS REPORT 2022 (CONSOLIDATED) Net fees declined by 3% y-o-y in local currency, largely due to the decrease in commission income related to more restrained retail lending. Other net non-interest income expanded by 87% y-o-y in 2022, mostly owing to higher income from currency exchange. In the course of 2022, significant inflationary pressure developed in the country, the inflation rate peaking at over 34% in October-November decreased to 30.2% by December. This was reflected in the 20% y-o-y increase in annual operating expenses in local currency. This is reflected in the 20% y-o-y increase in annual operating costs measured in local currency. Despite this, the cost efficiency indicator improved significantly, the cost/income ratio in 2022 was below 37% (-11.8 pps y-o-y). The impact of the downturn in the economy and the high inflation affecting income conditions was primarily manifested in the deterioration of the retail loan portfolio; the trend was further exacerbated by the shrinking volumes. In 2022, total risk costs increased sixfold y-o-y, nominally amounting to nearly HUF 7 billion. A large part of this arose in connection with the revision of IFRS 9 parameters. The Stage 2 ratio jumped by 9.8 pps y-o-y; the coverage of Stage 2 loans' own provisions also improved by 4.7 pps y-o-y to 18.3%. At the end of 2022, the ratio of Stage 3 loans was 2.8% (+0.9 pp y-o-y), their own coverage increased to 61.3%. The FX-adjusted performing (Stage 1+2) loan portfolio decreased by 5% y-o-y, within which the drop in retail loans was 14%, while the corporate portfolio expanded by 4%. As of the summer of 2022, OTP Bank Moldova has stopped retail lending and significantly reduced its lending activities on the corporate side as well. The FX-adjusted deposit book declined by 2% y-o-y, mostly because deposits from large corporations contracted (-8%). At the end of December 2022, the market share of OTP's Moldovan operation by total assets reached 14.2%, thereby maintaining its 3rd place in the banking ranking. INTEGRATED ANNUAL REPORT 2022 66 OTP BANK BUSINESS REPORT 2022 (CONSOLIDATED) STAFF LEVEL AND OTHER INFORMATION OTP Core DSK Group (Bulgaria) OBH (Croatia) OTP Bank Serbia SKB Banka (Slovenia) OTP Bank Romania OTP Bank Ukraine (w/o employed agents) OTP Bank Russia (w/o employed agents) CKB Group (Montenegro) OTP Bank Albania Mobiasbanca (Moldova) Foreign subsidiaries, total Other Hungarian and foreign subsidiaries OTP Group (w/o employed agents) OTP Bank Russia - employed agents OTP Bank Ukraine - employed agents OTP Group (aggregated) 31/12/2021 31/12/2022 Branches ATM POS Headcount (closing) Branches ATM POS Headcount (closing) 356 1,906 135,901 15,580 311 1,046 11,384 467 114 15,038 298 187 4,940 82 49 7,843 148 95 85 176 134 220 34 39 51 117 86 151 1,099 2,791 293 607 7,251 0 0 62,936 352 1,866 998 305 428 111 265 155 81 49 156 97 71 150 108 191 33 58 53 116 213 156 1,040 2,754 143,078 16,559 11,344 18,049 4,925 8,325 263 534 7,529 831 0 68,359 10,523 5,539 2,279 2,707 864 1,740 2,341 4,992 517 454 899 22,332 568 33,424 3,783 657 10,985 5,358 2,294 2,632 875 1,826 2,134 4,471 497 730 896 21,713 619 33,318 2,431 227 1,455 4,697 198,837 37,864 1,392 4,620 211,437 35,976 Definition of headcount number: closing, active FTE (full-time employee). The employee is considered as full-time employee in case his/her employment conditions regarding working hours are in line with a full-time employment defined in the Labour Code in the reporting entity's country. Part-time employees are taken into account proportional to the full-time working hours being effective in the reporting entity’s country. INTEGRATED ANNUAL REPORT 2022 67 OTP BANK BUSINESS REPORT 2022 (CONSOLIDATED) STATEMENT ON CORPORATE GOVERNANCE PRACTICE Corporate governance practice OTP Bank Plc., being registered in Hungary, has a corporate governance policy that complies with the provisions on companies of the act applicable (Civil Code). As the company conducts banking operations, it also adheres to the statutory regulations pertaining to credit institutions. Beyond fulfilling the statutory requirements, as a listed company on the Budapest Stock Exchange (BSE), the company also makes an annual declaration on its compliance with the BSE’s Corporate Governance Recommendations. After being approved by the General Meeting, this declaration is published on the websites of both the Stock Exchange (www.bet.hu) and the Bank (www.otpbank.hu). System of internal controls OTP Bank Plc., as a provider of financial and investment services, operates a closely regulated and state- supervised system of internal controls. OTP Bank Plc. has detailed risk management regulations applicable to all types of risks (credit, country, counterparty, market, liquidity, operational, compliance), which are in compliance with the regulations on prudent banking operations. The Bank Group pays special attention to the management of ESG risks and the implementation of climate protection aspects in business practice. Its risk management system extends to cover the identification of risks, the assessment and analysis of their impact, elaboration of the required action plans and the monitoring of their effectiveness and results. The business continuity framework is intended to provide for the continuity of services. Developed on the basis of international methodologies, the lifecycle model includes process evaluation, action plan development for critical processes, the regular review and testing of these, as well as related DRP activities. OTP Bank Plc.'s internal audit system is realised on several levels of control built on each other. The system of internal checks and balances includes process-integrated control, management control, independent internal audit organisation and executive information system. The independent internal audit organisation as a key element of internal lines of defence promotes the statutory and efficient management of assets and liabilities, the defence of property, the safe course of business, the efficient operation of internal control systems, the minimisation of risks, moreover it reveals and reports deviations from statutory regulations and internal rules, makes proposal to abolish deficiencies and follows up the execution of actions. The independent internal audit organisation annually and quarterly prepares group-level reports on control actions and audit results for the executive boards. Once a year, the internal audit organisation with the prior opinion of the Audit Committee draws up, for the Supervisory Board, the Board of Directors and the Risk Assumption and Risk Management Committee, objective and independent reports in respect of the operation of risk management, internal control mechanisms and corporate governance functions. Furthermore, in line with the provisions of the Credit Institutions Act, reports, once a year, to the Supervisory Board and the Board of Directors on the regularity of internal audit tasks, professional requirements and the conduct of audits, and on the review of compliance with IT and other technical conditions needed for the audits. In line with the regulations of the European Union, the applicable Hungarian laws and supervisory recommendations, OTP Bank Plc. operates an independent organisational unit with the task of identifying and managing compliance risks. The Compliance Directorate prepares a report quarterly to the Board of Directors, and annually to the Supervisory Board, about the Bank’s and the Bank Group’s compliance activities and position. IT Controls Applications are developed by either in-house group resources or by third parties. OTP Bank applies administrative, logical and physical control measures commensurate with the risk in order to protect the IT systems storing and processing data, as follows: • access to data/systems is only possible on the basis of a predefined authorisation management process that applies the principle of least privilege, ensures segregation of responsibilities, that has regular access right reviews and ensures that dismissed employees’ access is revoked in a timely manner; • user authentication, authorisation and password management processes are controlled by policies and • audited; the systems have well-separated test and development environments along with a secure change management procedure, which ensures that program developments or modifications can only be deployed to the operational environment after proper, controlled testing and approval; • systems are protected by appropriate network perimeter protection, various security devices and network segmentation, furthermore all network communications are protected with state-of-the-art encryption; INTEGRATED ANNUAL REPORT 2022 68 OTP BANK BUSINESS REPORT 2022 (CONSOLIDATED) • the IT systems that store and process data are regularly backed up and backup media is stored in controlled premises with adequate protection for long-term retention, and the organisation carries out regular backup restore tests; • adequate redundancy is applied for IT systems that store and process data to ensure business continuity and disaster resiliency; • has developed DRPs and BCPs for critical systems and critical business processes, which is regularly • • • • • • • • tested and reviewed; the Bank collects and retains the complete log of all major IT operations and IT security relevant data processing activities and the confidentiality, availability, integrity, authenticity and non-repudiation of these audit logs are ensured; there is a continuous, up-to-date protection against malicious codes; it ensures the regular implementation of vendor patches and updates for the environments used; it uses a data leakage protection (DLP) solution to reduce the risk of inadvertent data loss; it ensures the continuous monitoring of the operation events of the physical and virtual environment system elements with automated event detection and management tools; the above measures are documented at an appropriate level, which ensures the traceability of the implementation of data security requirements in a transparent manner; it ensures permanent secure deletion of the data stored on the media, the destruction of the media and the documentation of the destruction of the media during secure operational media disposal processes; it enforces data protection requirements already at the design stage of the implementation of the IT systems storing and processing personal data and of the systems operational processes related to them; • acquire and maintain ability to adequately handle application related security events, including prevention, • detection, identification, isolation, analysis, recovery and reporting; remote work is regulated in a controlled and documented way, remote accesses are protected with multi- factor authentication; revision and update of IT security regulations with required frequencies; • ensures IT security compliance within operated regulative framework; • • ensures vulnerability assessments and penetration tests are carried out as planned; • define pools for categorization of installed software into preferred, allowed and prohibited. Ensure policy • is followed. it ensures that its employees have adequate knowledge of data protection requirements and provides regular data protection and information security awareness training for them. General Meeting The General Meeting is the supreme governing body of OTP Bank Plc. The regulations pertaining to its operation are set forth in the Company’s Articles of Association, and comply fully with both general and special statutory requirements. Information on the General Meeting is available in the Corporate Governance Report. The General Meeting was held on 13 April 2022 in accordance with the general rules, traditionally, with the personal participation of the shareholders, subject to Section 3 (1) of the Government Decree 502/2020. (XI. 16.) on the re-introduction of deviation provisions pertaining to the operation of partnerships and corporations during the state of emergency, also in line with the Act I of 2021 on the prevention of the coronavirus pandemic. Regulations and information to be presented in the Business Report concerning securities conferring voting rights issued by the Company and senior officials, according to the effective Articles of Association, and ownership structure The Company’s registered capital is HUF 28,000,001,000, that is twenty-eight thousand million one thousand Hungarian forint, divided into 280,000,010 that is Two hundred and eighty million and ten dematerialised ordinary shares with a nominal value of HUF 100 each, and a total nominal value of HUF 28,000,001,000, that is twenty eight billion one thousand Hungarian forint. The ordinary shares of the Company specified all have the same nominal value and bestow the same rights in respect of the Company. There are no restrictions in place concerning the transfer of issued securities constituting the registered capital of the Company. No securities with special control rights have been issued by the Company. Special Employee Partial Ownership Plan Organization No. I. of OTP Employees and Special Employee Partial Ownership Plan Organization No. II. of OTP Employees (hereinafter referred to as: OTP SEP OPs) were established based on the decision of the Company’s certain employees and executives considered as INTEGRATED ANNUAL REPORT 2022 69 OTP BANK BUSINESS REPORT 2022 (CONSOLIDATED) employees pursuant to the Act XLIV of 1992 on Employee Partial Ownership Plan. Management rights of OTP SEPOPs are exercised by a trust named Alapítvány az OTP Munkavállalók Különleges Résztulajdonosi Programjáért, founded by the same employees setting up OTP SEPOPs. The Company did not participate either in foundation or in management of OTP SEPOPs. The Company in line with the ESOP Act initiated an employee share ownership plan having a remuneration purpose and founded OTP Bank ESOP Organization for its execution (hereinafter referred to as ESOP Organization). Pursuant to the laws, the management rights over the ESOP Organization are exercised by a law firm, the so called trustee. In the case of the ESOP Organization Szűcs Law Firm is entitled to exercise the authorities of the trustee. The Company participated in the foundation of the ESOP Organization, however, after its foundation it cannot participate in its management, and according to the laws, it is not entitled to either give orders or to recall the trustee. Rules on the restrictions of the voting rights: The Company’s ordinary shares confer one vote per share. An individual shareholder or group of shareholders may not exercise voting rights in respect of in an extent exceeding 25%, or – if the voting rights of another shareholder or group of shareholders exceed 10% – exceeding 33% of the total voting rights represented by the shares conferring voting rights at the Company’s General Meeting. The shareholder is obliged to notify the Company’s Board of Directors without delay if the shareholder directly or indirectly, or together with other shareholders in the same group of shareholders, holds more than 2% of the voting rights represented by the shares conferring voting rights at the Company’s General Meeting. Concurrently with this, the shareholder is obliged to designate the shareholders through which the indirect voting right exists, or the members of the group of shareholders. In the event of a failure to provide such notification, or if there are substantive grounds for assuming that the shareholder has made a misleading declaration regarding the composition of the shareholder group, then the shareholder’s voting right shall be suspended and may not be exercised until the shareholder has met the above obligations. The notification obligation stipulated in this paragraph and the related legal consequences are also incumbent upon individuals who are classified or may be classified as the Company’s shareholders under Article 61 of the Capital Markets Act. The Company must also be provided with proof of the conditions for exemption from the notification obligation in accordance with Section 61 (7)-(8) and Section 61 (10)-(11)-(12), of the Capital Markets Act. Shareholder group: the shareholder and another shareholder, in which the former has either a direct or indirect shareholding or has an influence without a shareholding (collectively: a direc t and/or indirect influence); furthermore: the shareholder and another shareholder who is exercising or is willing to exercise its voting rights together with the former shareholder, regardless of what type of agreement between the participants underlies such concerted exercising of rights. For determining the existence and extent of the indirect holding, the rules of the Credit Institutions Act relating to the calculation of indirect ownership shall be applied. If the voting rights that may be exercised by a shareholder group exceed the threshold stipulated in the first paragraph of this section, the voting rights shall be reduced in such a way that the voting rights relating to the shares most recently acquired by the group of shareholders shall not be exercisable. If there are substantive grounds to presume that the exercising of voting rights by any shareholder or shareholders might result in a breach of the rules of the Capital Markets Act relating to the acquisition of a controlling interest, the Board of Directors’ authorised representative responsible for the registration of shareholders at the venue of the General Meeting, or the Chairman of the General Meeting, may exclude the affected shareholders from attending the General Meeting or exercising voting rights. The General Meeting has exclusive authority with respect to the decision regarding the delisting of the shares (qualified majority). When making the decisions, shares embodying multiple voting rights shall represent one share. The Company is not aware of any kind of agreements among the owners that could give rise to the restriction of the transfer of issued securities and/or the voting rights. Rules on the appointment and removal of executive officers, and rules on amendment of the Articles o f Association: The Board of Directors has at least 5, and up to 11 members. INTEGRATED ANNUAL REPORT 2022 70 OTP BANK BUSINESS REPORT 2022 (CONSOLIDATED) When making the decisions, shares embodying multiple voting rights shall represent one share. The members of the Board of Directors are elected by the General Meeting based on its decision uniformly either for an indefinite period or for five years; in the latter case the mandate ends with the General Meeting concluding the fifth financial year following the election. The mandate of a member elected during this period expires together with the mandate of the Board of Directors. The Board of Directors elects a Chairman and, may elect one or more Deputy Chairmen, from among its own members, whose period of office shall be equal to the mandate of the Board of Directors. The Chairman of the Board of Directors is also the Chief Executive Officer (Chairman & CEO) of the Company, unless the Board of Directors decides within its competence that the position of Chairman of the Board of Directors and the Chief Executive Officer of the Company are held by separate persons. The membership of the Board of Directors ceases to exist by g. expiry of the mandate, h. resignation, recall, i. j. death, k. l. the occurrence of grounds for disqualification as regulated by law. termination of the employment of internal (executive) Board members. The General Meeting has exclusive authority with respect to the following matters: • the recall of members of the Board of Directors, the Supervisory Board and Audit Committee, and of the auditor; (qualified majority) More than one third of the members of the Board of Directors and the non-executive members of the Supervisory Board may be recalled within a 12-month period only if any shareholder holds more than 33% of the shares issued by the Company, which have been obtained by the shareholder by way of a public purchase offer. • except in the cases referred by these Articles of Association to the authority of the Board of Directors, the establishment and amendment of the Articles of Association; (qualified majority); the General Meeting decides on proposals concerning the amendment of the Articles of Association – based on a resolution passed by shareholders with a simple majority – either individually or en masse. The Board of Directors is obliged to • prepare the Company’s financial statements in accordance with the Accounting Act, and make a proposal for the use of the profit after taxation; • prepare a report once a year for the General Meeting, and once every three months for the Supervisory Board, concerning management, the status of the Company’s assets and business policy; • provide for the proper keeping of the Company's business books; • perform the tasks referred to its authority under the Credit Institutions Act, in particular: - ensuring the integrity of the accounting and financial reporting system; - elaborating the appropriate strategy and determining risk tolerance levels for each business unit concerned; - setting risk assumption limits; - providing the necessary resources for the management or risk, the valuation of assets, the use of external credit ratings and the application of internal models. The following, in particular, come under the exclusive authority of the Board of Directors: • election of the Chairman & Chief Executive Officer of the Company, and exercising employer’s right in respect thereof; • election of one or more Deputy Chairmen of the Board of Directors; • determination of the annual plan; • the analysis and assessment of the implementation of business-policy guidelines, on the basis of the Company’s quarterly balance sheet; • decisions on transactions referred to the authority of the Board of Directors by the Company's organisational and operational regulations; • decision on launching, suspending, or terminating the performance of certain banking activities within the scope of the licensed activities of the Company; • designation of the employees entitled to sign on behalf of the Company; • decision on the increasing of registered capital at the terms set out in the relevant resolution of the General Meeting; • decision to acquire treasury shares at the terms set out in the relevant resolution of the General Meeting; • decision on approving internal loans in accordance with the Credit Institutions Act; INTEGRATED ANNUAL REPORT 2022 71 OTP BANK BUSINESS REPORT 2022 (CONSOLIDATED) • decision on the approval of regulations that fundamentally determine banking operations, or are referred to its authority by the Credit Institutions Act. The following shall qualify as such regulations: - - - - - - - the collateral evaluation regulations, the risk-assumption regulations, the customer rating regulations, the counterparty rating regulations, the investment regulations, the regulations on asset classification, impairment and provisioning, the organisational and operational regulations, which contain the regulations on the procedure for assessing requests related to large loans, the regulations on the transfer of signatory rights; - the decision on approving the Rules of Procedure of the Board of Directors; • • decision on steps to hinder a public takeover procedure; • decision on the acceptance of a public purchase offer received in respect of treasury shares; • decision on the commencement of trading in the shares in a regulated market (flotation); • decision on the cessation of trading in the shares in a given regulated market, provided that the shares are traded in another regulated market (hereinafter: transfer). The Board of Directors is exclusively authorised to: • decide, in the cases specified in the Civil Code, on acceptance of the Company’s interim balance sheet, subject to the prior approval of the Supervisory Board; • decide, instead of the General Meeting, to pay an advance on dividends, subject to the preliminary approval of the Supervisory Board; • make decisions regarding any change in the Company’s name, registered office, permanent establishments and branches, and in the Company’s activities – with the exception of its core activity – and, in relation to this, to modify the Articles of Association should it become necessary to do so on the basis of the Civil Code or the Articles of Association; • make decision on mergers (if, according to the provisions of the law on the transformation, merger and demerger of legal entities, the approval of the General Meeting is not required in order for the merger to take place). The Board of Directors directly exercises employer's rights in respect of the Chairman & CEO. The person affected by a decision may not participate in the decision making. Employer rights in respect of the executive directors of the Company are exercised by the Board of Directors through the Chairman & CEO, with the proviso that the Board of Directors must be notified in advance of the appointment and dismissal of the Deputy CEOs. With regard to issues related to the exercising of employer's rights in respect of employees, the Company is represented by the Chief Executive Officer and by the senior company employees defined in the Organisational and Operational Regulations of the Company, in accordance with the delegation of authority approved by the Board of Directors. If the Chairman of the Board of Directors and the CEO are different persons, the employer rights in respect of the other executive directors of the Company (CEO, deputy CEOs) are exercised by the Board of Directors through the Chairman of Board of Directors, with the proviso that the Board of Directors shall be notified in advance of the appointment and dismissal of the CEO and Deputy CEOs. With regard to issues related to the exercising of employer's rights in respect of employees, the Company is represented by the persons defined in the Organisational and Operational Regulations of the Company, in accordance with the delegation of authority approved by the Board of Directors. The Board of Directors may delegate, to individual members of the Board of Directors, to executive directors employed by the Company, and to the heads of the individual service departments, any task that does not come under the exclusive authority of the Board of Directors in accordance with these Articles of Ass ociation or a General Meeting resolution. The Company may acquire treasury shares in accordance with the rules of the Civil Code. The prior authorisation of the General Meeting is not required for the acquisition of treasury shares if the acquisition of the shares is necessary in order to prevent a direct threat of severe damage to the Company (this provision is not applicable in the event of a public purchase offer aimed at buying up the Company’s shares), as well as if the Company acquires the treasury shares in the context of a judicial procedure aimed at the settlement of a claim to which the Company is entitled, or in the course of a transformation. The Company has not made agreements in the meaning of points (j) and (k) in paragraph 95/A of Act No. C of 2000 on Accounting. INTEGRATED ANNUAL REPORT 2022 72 OTP BANK BUSINESS REPORT 2022 (CONSOLIDATED) Ownership structure of OTP Bank Plc. Description of owner Domestic institution/company Foreign institution/company Domestic individual Foreign individual Employees, senior officers2 Treasury shares3 Government held owner International Development Institutions Other4 TOTAL 1 January 2022 31 December 2022 Total equity Ownership share Voting rights1 26.66% 66.69% 4.79% 0.11% 0.48% 1.16% 0.07% 0.04% 0.00% 100.00% 26.97% 67.47% 4.84% 0.12% 0.48% 0.00% 0.07% 0.04% 0.00% 100.00% Quantity 74,637,180 186,733,858 13,405,389 319,712 1,341,018 3,251,484 188,326 120,871 2,172 280,000,010 Ownership share Voting rights 1 31.80% 50.05% 16.91% 0.52% 0.55% 0.13% 0.05% 0.00% 0.00% 100.00% 31.84% 50.11% 16.93% 0.52% 0.55% 0.00% 0.05% 0.00% 0.00% 100.00% Quantity 89,040,716 140,129,576 47,338,305 1,464,494 1,526,762 354,144 139,946 3,183 2,884 280,000,010 1 Voting rights in the General Meeting of the Issuer for participation in decision-making. 2 The shares indirectly owned by György Nagy, a member of the Board of Directors, were reclassified to the domestic individual category as of 31 December 2021. 3 Treasury shares do not include the OTP shares held by ESOP (OTP Bank Employee Stock Ownership Plan Organization). Pursuant to Act V of 2013 on the Civil Code, OTP shares held by the ESOP are not classified as treasury shares, but the ESOP must be consolidated in accordance with IFRS 10 Consolidated Financial Statements standard. On 31 December 2022 ESOP owned 10,965,752 OTP shares. 4 Non-identified shareholders according to the shareholders’ registry. Number of treasury shares held in the year under review (2022) OTP Bank Subsidiaries TOTAL 1 January 3,251,484 0 3,251,484 31 March 691,233 0 691,233 30 June 467,880 0 467,880 30 September 365,842 0 365,842 31 December 354,144 0 354,144 Shareholders with over/around 5% stake as at 31 December 2022 Name Nationality1 Activity2 MOL (Hungarian Oil and Gas Company Plc.) Groupama Group Groupama Gan Vie SA Groupama Biztosító Ltd. D F/D F D C C C C Number of shares 24,000,000 14,258,161 14,140,000 118,161 Ownership3 8.57% 5.09% 5.05% 0.04% Voting rights3,4 8.58% 5.10% 5.06% 0.04% Notes5 1 Domestic (D), Foreign (F). 2 Custodian (CU), Public Institution (PU), International Development Institutions (ID), Institutional (I), Company (C), Private (PR), Employee or senior officer (E). 3 Rounded to two decimals. 4 Voting rights in the General Meeting of the Issuer for participation in decision-making. 5 Eg: professional investor, financial investor, etc. Senior officers, strategic employees and their shareholding of OTP shares as at 31 December 2022 Type1 Name Position IT IT IT IT IT IT IT IT IT IT IT FB FB FB FB FB FB SP SP dr. Sándor Csányi 2 Chairman and CEO Deputy Chairman Tamás Erdei member Gabriella Balogh member Mihály Baumstark member, Deputy CEO Péter Csányi member dr. István Gresa Antal Kovács3 member, Deputy CEO György Nagy4 member dr. Márton Gellért Vági member member dr. József Vörös member, Deputy CEO László Wolf Chairman Tibor Tolnay Deputy Chairman dr. Gábor Horváth member Klára Bella member dr. Tamás Gudra member András Michnai member Olivier Péqueux Deputy CEO László Bencsik Deputy CEO György Kiss-Haypál TOTAL No. of shares held by management: Commencement date of the term 15/05/1992 27/04/2012 16/04/2021 29/04/1999 16/04/2021 27/04/2012 15/04/2016 16/04/2021 16/04/2021 15/05/1992 15/04/2016 15/05/1992 19/05/1995 12/04/2019 16/04/2021 25/04/2008 13/04/2018 Expiration/termination of the term 2026 2026 2026 2026 2026 2026 2026 2026 2026 2026 2026 2023 2023 2023 2023 2023 2023 Number of shares 325.047 43.085 8.193 53.600 9.648 182.858 114.759 34.800 8.500 186.714 535.347 54 0 408 0 100 0 12.744 10.905 1,526,762 1 Employee in strategic position (SP), Board Member (IT), Supervisory Board Member (FB) 2 Number of OTP shares owned by Dr. Sándor Csányi, Chairman and CEO, directly or indirectly: 4,602,174 3 Number of OTP shares owned by Antal Kovács, Member of Board of Directors, directly or indirectly: 119,059 4 Number of OTP shares owned by György Nagy, Member of Board of Directors, directly or indirectly: 1,118,955 INTEGRATED ANNUAL REPORT 2022 73 OTP BANK BUSINESS REPORT 2022 (CONSOLIDATED) Committees4 Members of the Board of Directors Dr. Sándor Csányi – Chairman Mr. Tamás Erdei – Deputy Chairman Ms. Gabriella Balogh Mr. Mihály Baumstark Mr. Péter Csányi Dr. István Gresa Mr. Antal Kovács Mr. György Nagy Dr. Márton Gellért Vági Dr. József Vörös Mr. László Wolf Members of the Supervisory Board Mr. Tibor Tolnay – Chairman Dr. József Gábor Horváth – Deputy Chairman Ms. Klára Bella Dr. Tamás Gudra Mr. András Michnai Mr. Olivier Péqueux Members of the Audit Committee Dr. József Gábor Horváth – Chairman Mr. Tibor Tolnay – Deputy Chairman Dr. Tamás Gudra Mr. Olivier Péqueux The résumés of the committee and board members are available in the Corporate Governance Report/Annual Report. Personal and organizational changes On 13 April 2022, concerning the audit of OTP Bank Plc.’s separate and consolidated annual financial statements in accordance with International Financial Reporting Standards for the year 2022, the Annual General Meeting elected Ernst & Young Ltd. as the Company’s auditor from 1 May 2022 until 30 April 2023. From 1 January 2023 Antal Kovács' position was taken over by András Becsei as the Retail Division Deputay CEO. Antal Kovács will retain his employment status, thus his position as Deputy CEO until the Annual General Meeting closing the financial year 2022, during which time he will mainly be responsible for group governance. Operation of the executive boards OTP Bank Plc. has a dual governance structure, in which the Board of Directors is the Company’s executive management body in its managerial function, while the Supervisory Board is the management body in its supervisory function of the Company. It controls the supervision of the lawfulness of the Company’s operation, its business practices and management, performs oversight tasks and accepts the provisions of the Bank Group's Remuneration Policy. The effective operation of Supervisory Board is supported by the Audit Committee, as a committee, which also monitors the internal audit, the risk management, the reporting systems and the activities of the auditor. In order to assist the performance of the governance functions the Board of Directors founded and operates, as permanent or other committees, such as the Management Committee, the Remuneration Committee, the Nomination Committee and the Risk Assumption and Risk Management Committee. To ensure effective operation OTP Bank Plc. also has a number of further permanent committees. OTP Bank Plc. gives an account of the activities of the executive boards and the committees every year in its Corporate Governance Report. 4 Personal changes can be found in the „Personal and organizational changes” chapter. INTEGRATED ANNUAL REPORT 2022 74 OTP BANK BUSINESS REPORT 2022 (CONSOLIDATED) The Board of Directors held 6, the Supervisory Board held 7 meetings, while the Audit Committee held 2 meetings in 2022. In addition, resolutions were passed by the Board of Directors on 139, by the Supervisory Board on 73 and by the Audit Committee on 24 occasions by written vote. Policy of diversity OTP Bank Plc. determines and regulates the criteria for the selection of senior executives in line with European Union as well as domestic legal requirements and directives fundamentally determining the operation of credit institutions. When designating members of the management bodies (Board of Directors, Supervisory Board) as well as appointing members of the Board of Directors and administrative members (Management), OTP Bank Plc. considers the existence of professional preparation, the high-level human and leadership competence, the versatile educational background, the widespread business experience and business reputation of the utmost importance, at the same time, it is also highly committed to taking efficient measures in order to ensure diversity with regard to corporate operation, including the gradual improvement in women’s participation rate. OTP Bank Plc.’s Nomination Committee continuously keeps tracking the European Union and domestic legislation relating to women’s quota on its agenda, in that when unambiguously worded expectations are announced, it promptly takes the necessary measures. In accordance with OTP Bank Plc.’s currently approved strategy, the goal is to have at least one female member in both the Bord of Directors and the Supervisory Board. It is important to note, however, that, as a public limited company, the selection of the members of the management bodies falls within the exclusive competence of the General Meeting upon which – beyond its capacity to designate enforcing the above aspects to maximum effect – OTP Bank Plc. has no substantive influence. According to OTP Bank Plc.’s Articles of Association, a Board of Directors comprising 5-11 members and a Supervisory Board comprising 5-9 members are set up at OTP Bank Plc. Currently the Board of Directors operates with 11 members and has one female member, the Supervisory Board comprises 6 members and has one female member. The management of OTP Bank Plc. currently comprises 7 members and has no female member. Fight against corruption and against the practice of bribery discrimination The Code of Ethics and the Anti-Corruption Policy of OTP Bank contains provisions on the fight against corruption and against the practice of bribery, also on the acceptance of individual differences and the denial of https://www.otpbank.hu/static/portal/sw/file/OTP_EtikaiKodex_EN.pdf, (otpbank.hu)). As it can be read in the foreword of the Code and the Anti-Corruption Policy as well, the Bank and its management have adopted the principle of zero tolerance towards corruption and bribery, taking a definite stance against all forms of corruption and giving full support to the fight against corruption. In addition, the Code states that "As an ethical and compliant institution, the Bank and its management are fully committed to ensuring observance of all relevant legislation, including anti-corruption statutes." (https://www.otpbank.hu/portal/en/EthicalDeclaration Anti_Corruption_Policy.pdf The Bank has set up an ethics reporting system (whistleblowing), which is for the reporting and the handling of the reports on suspected or actual violation of the values set forth in the Code of Ethics, where anonymous reporting of ethics issues is also possible. The Bank conducts inquiries for the purpose of detecting, preventing anomalies in connection with reports made or anomalies it became aware of otherwise. Through the Bank's ethics reporting system a total of 152 reports were received in 2022. In 70 of these reports, we deemed it necessary to conduct an ethical procedure and 10 case’s investigation resulted in declaring ethics offense – though not due to corruption, bribery or discrimination. The Bank has created and maintains its Code of Ethics to keep reputational risk and financial losses, which may incur in relation to corruption, bribery and discrimination, on a minimum level. Both employees and newcomers receive education on the Code of Ethics, and in addition, the acceptance to be bound by it is a prerequisite for their employment. In addition, all business partners and clients are communicated about the Anti-Corruption Policy and procedures through the Code of Ethics and Anti-Corruption Policy published publicly on the Bank's website. The Anti-Corruption Policy stipulates that, in view of the fact that existing and established relationships with contractual partners also contain the possibility of corruption, the Bank will act prudently in its dealings with contractors, in particular in the tendering and preparation process, to minimise the risk of corruption. The Bank establishes relationships with its contractual partners based on an assessment of professionalism, INTEGRATED ANNUAL REPORT 2022 75 OTP BANK BUSINESS REPORT 2022 (CONSOLIDATED) competence and competitiveness, and does not apply other non-professional selection criteria that contain the possibility of corruption. Any requests from third parties affecting human rights are treated by the Bank as a priority. We manage the risks regarding the fight against corruption and bribery within the framework of our operational risk management process. Our quarterly compliance reports cover the changes in risks as well as the steps necessary steps to manage them. The reports are presented to the Management Committee and the Board of Directors; the annual report is also submitted to the Supervisory Board. Non-financial performance indicators • Internal audit: 176 closed audits, 1,142 recommendations, 1,141 accepted recommendations. • Compliance with Budapest Stock Exchange (BSE) Recommendations (yes/no ratio): 72 yes, 0 no. • Compliance: 6 closed consumer protection related investigations. • Bank security investigations, reports: we filed a criminal complaint in connection with a total of 655 cases (728 in 2021), and in 8 cases we filed a report with the various authorities. • Official reports made on suspicion of money laundering: in the relevant period, we filed official reports on suspicion of money laundering in 315 cases. The total amount included in the reports: HUF 13.6 billion. Notifications: We made 3,476 notifications to National Tax and Customs Administration Anti-Money Laundering and Terrorist Financing Office in connection with money laundering. The total amount included in the notifications was HUF 1.1 billion. The expected damage value from the discovered crimes is more than HUF 1 billion, which is more than the requested amount of the realized loss last year, which was HUF 445 million (680 million HUF in 2020, 533 million HUF in 2019). The majority of the loss occurred in the area of financial abuse. Regarding the year 2022, according to our data, a loss of close to HUF 1.3 billion was prevented by thwarting attempts to defraud the bank. (It can be concluded that in the year 2022, the number of abuses committed on the electronic interface to the detriment of customers has increased almost ninefold, compared to last year. The perpetrators rely on the IT education deficiencies and inexperience of the customers. As a result, there is also an exceptional increase in customer losses, which was around HUF 3 billion.) In 2022, a total of 1,874 suspicious transactions with a total value of HUF 31.7 billion will be screened in the monitoring filter system used to filter international payment orders. Of these, 170 transfers HUF 5 billion in total were confiscated due to suspicion of money la undering, and 1,704 transfers HUF 26.7 billion in total due to suspicion of fraud. Compared to 2020 and 2021, an increase can be observed in connection with bank card abuse, both in terms of the number of attempted abuses and the damage. In 2022, the value of successful bank card abuses exceeded HUF 1.9 billion (HUF 820 million in 2021), of which the value of successful transactions with cards issued by OTP amounted to HUF 1.7 billion (HUF 667 million in 2021). As a result of the preventive security measures taken by the bank, the value of fraudulent bank card transactions is HUF 4,993.4 million. (2021 HUF 5,440.2 million, 2020 HUF 2,159.2 million). Of this, the value of abuses prevented in the case of cards issued by OTP is HUF 4,784.1 million (2021: HUF 5.2 billion). in 2022 failed that Despite the negative tendencies, in the case of OTP the ratio of bank card misuse to turnover remained lower than the European average published by MasterCard (last year's figures: OTP Bank 0.0108%, European average 0.0421%). • Ethics issues: 152 ethics reports, establishing ethics offense in 10 cases. INTEGRATED ANNUAL REPORT 2022 76 OTP BANK BUSINESS REPORT 2022 (CONSOLIDATED) SUSTAINABILITY ACTIVITIES OF THE OTP GROUP IN 20225 NON-FINANCIAL STATEMENT The following parts of the document called OTP Bank Plc. non-financial statement up to and including subsection 6.2. SUSTAINABILITY APPROACH Connecting to the UN Sustainable Development Goals The 17 Sustainable Development Goals (SDG) formulated by the UN set up a new, universal measure for development by 2030, taking a stand for the elimination of poverty, the fight against climate change and inequalities. The OTP Group is committed to facilitate the SDGs. The Banking Group can, and wishes to, contribute to the following goals to the greatest extent: 4. Quality education, 7 Affordable and clean energy, 8 Decent work and economic growth, 9 Industry, Innovation and Infrastructure, 13 Climate action. The goals of the ESG strategy are also linked to these. 5 Symbols @ For more information see another page of the Business Report or the home page. The symbols for, and the contents of, the indicators GRI 2-1, ST1, TCFD I, FN-CB-240a.4 etc. are to be found in the @GRI content index. Data and information on specific subsidiary banks and/or countries are marked with the respective country codes: AL BG HU HR MO MD RO RS RU UA SI INTEGRATED ANNUAL REPORT 2022 77 OTP BANK BUSINESS REPORT 2022 (CONSOLIDATED) GRI 3-3 The SDG goals and indicators are affected6 by the OTP Group’s activities as detailed below: Stability ST4: 3-3 Impact: The members of OTP Group are key participants in several markets within the CEE region, and through their operations and results they have a significant impact on the respective countries’ economies and financial systems, as well as on improving the standard of living. Contribution: Stability is one of the most important values for the Banking Group, therefore it spares no effort to secure this. Its solid background is demonstrated, among others, by its traditionally high CET 1 and liquidity ratios, its prudent risk management and the low ratio of non-performing loans. Tax payment GRI 207: 3-3, 207-1 Impact: Through tax payment, the Banking Group makes a meaningful contribution to the provision of community services and the management of social inequalities, thus ultimately to socio-economic stability. Contribution: The OTP Group is a major taxpayer, committed to maximum compliance with the laws and regulations even when fulfilling its tax payment obligations. Lending, investment ST1, ST5, ST6, ST10:3-3 Impact: Through responsible placement of funds the Banking Group enables purchases, consumption and the implementation of investments. Therefore, we have an impact not only on the customers but, indirectly, also on economic growth, people's living standards, and basic needs such as housing, and the utilisation of natural resources. Contribution: The scoring system ensures prudent lending, a crucial requirement for the protection of deposit holders' funds and the prevention of excessive indebtedness. We are committed to promoting our customers' financial welfare and we offer them products that are aligned to their real needs and possibilities. Also very important for the Banking Group is to enable facilities with the involvement of public and international institutions, in many cases going beyond its market share. We contribute to environmentally sustainable economic transition by sustainability risk management and by offering green products. Access to financial services ST9: 3-3 Impact: We make the use of our services subject to strict conditions – this is equally important for the Banking Group's stability and the interests of our customers. To ensure equal opportunities and promote the principles of social solidarity, however, it is also crucial that the bank's services be accessible, that disadvantaged people also have access to the basic functions required for managing their finances and to funds, as far as possible. 6 The sub-goals and indicators are global or national, the contribution to achieving these goals is indirect at the company level. It is even more indirect in the case of financial institutions, which can contribute to achieving a number of goals by making the financial resources available. INTEGRATED ANNUAL REPORT 2022 78 OTP BANK BUSINESS REPORT 2022 (CONSOLIDATED) Contribution: The Banking Group has an extensive network of branches and ATMs and is providing access for a steadily increasing clientele through digital services. We strive to provide equal opportunity in our services to persons living with disabilities. Our retail account packages with all basic functions are available without an account management fee. Our services are available for micro and small enterprises as well. Development of financial literacy ST10, ST12: 3-3 Impact: Financial products and services may be highly complex – financial literacy is indispensable for one to understand such products and services, for making responsible and good financial decisions as well as for accomplishing one's objectives. Acquiring such knowledge is more difficult for members of vulnerable groups, although this is even more important for them in creating a stable financial background. Contribution: We always aim to make sure that our communication is clear and straightforward. Training videos and calculators are provided for customers to help them better understand financial services and how they work; they also come in handy in managing their revenues and expenditures. The OK Educational and Innovation Centre and the OTP Fáy András Foundation provide free finance and economics courses in Hungary, Slovakia, Romania and Moldova, helping thousands of students and adults every year to expand their knowledge. Employment GRI 401, 404, 405, ST3: 3-3 Impact: OTP Group is a major employer both in Hungary and across the region, directly as well as through its intermediary partners and supplier chain. Contribution: The Banking Group is committed to responsible employment, equal opportunity, the opportunity for personal growth and work-life balance; it provides equitable income that is proportionate to performance and sufficient to finance a decent living standard. Compliance with the requirements laid down in the Code of Ethics is expected on the part of our business partners as well. INTEGRATED ANNUAL REPORT 2022 79 OTP BANK BUSINESS REPORT 2022 (CONSOLIDATED) Environment ST5, ST6, ST7, ST8, GRI 305: 3-3 Impact: The capital projects and operations implemented with our financing and investments have a significant impact on the use of natural resources and may facilitate the success of efforts to mitigate, and adapt to climate change. The resource requireme nts of the Banking Group's operations also impact the environment. Contribution: The OTP Group is committed to green financing, in which it wishes to take the lead. The Banking Group also plays a dominant role in the implementation of initiatives of state and international institutions. Our objective is to reduce the environmental impact of our operations. Communities Impact: OTP Group is an organic part of society and local communities. Contribution: In line with our values, we play an active role in the progress of local communities and in supporting disadvantaged persons. OTP Bank is one of the most generous charitable donors in Hungary. Materiality analysis GRI 3-1 Materiality analysis is a fundamental and guiding element of our activities promoting sustainable development and our sustainability reports. Materiality can be defined in a variety of ways. Materiality analysis is based on the GRI Standards requirements and guidelines. Its basic principle is that material topics are the ones that represent the organisation's most significant impacts on the economy, the environment and people, including human rights, (impact materiality). In the Dow Jones Sustainability World Index approach material are the sustainability factors that have, or may, in the future, have significant impacts on the company's value/value factors, competitive position, including long term shareholder value generation and business performance (financial materiality) 7. The Union's Corporate Sustainability Reporting Directive (CSRD) will require reporting companies to observe the principle of "double materiality". Accordingly, each dimension (impact and financial) was applied in our analysis – prioritising the GRI requirements. The potentially material impacts: • • the stakeholder survey, the other available stakeholder feedback (customer satisfaction survey, employee engagement survey) topics of the GRI Standards • • ESG ratings topics • identified on the basis of the topics comprised in the UN PRB impact analysis tools GRI 207-3 The stakeholder survey was conducted with the involvement of authorities and public bodies, professional associations and representatives of civil society organisations and scientific organisations with experience in various segments of sustainability, having a comprehensive overview, with adequate information on the activities of the OTP Group, sustainability experts, media representatives, the representative of OTP Bank's trade union and representatives of sales partners. In-depth interviews were conducted with groups of stakeholders as well as individual stakeholders by an external professional consultant without the involvement of the Banking Group's representatives to 7 Financial materiality is defined in various ways, which are essentially identical in terms of contents; the Dow Jones Sustainability World Index has been measuring large enterprises' ESG performance since 1999 and has been producing the most comprehensive Corporate Sustainability Assessment (CSA) year after year so far, which is why its definition is regarded as adequately authentic. INTEGRATED ANNUAL REPORT 2022 80 OTP BANK BUSINESS REPORT 2022 (CONSOLIDATED) encourage the expression of honest opinions. The stakeholders identified sustainability topics considered as material in regard to the Banking Group. According to the respondents, being a major market participant entails a great deal of responsibility, and they also expect OTP Bank to be an example and provide guidance in relation to sustainability. Key sustainability topics identified during the stakeholder survey (in the order of importance): INTEGRATED ANNUAL REPORT 2022 81 OTP BANK BUSINESS REPORT 2022 (CONSOLIDATED) • Green financing (and environmental impact/load) • Ensuring the operability of the economy • Digitalisation • Development of financial literacy • Gender equality • Environmental protection in operation • Environmental awareness raising • Donations • Compliance Additional important topics: • Consumer protection and product responsibility • Disadvantaged persons’ access to funds • Protection of personal data • Access to and application of financial services by persons with disabilities • Sustainability aspects of procurements The stakeholders clearly found the environmental impacts of financing more important this time than in earlier surveys and in their earlier feedback. The OTP Group's list of impact areas was put together on the basis of feedback from stakeholders and other sources and evaluated them in the first round on the basis of the impacts on sustainability: economy, environment and society. Evaluation was based on objective metrics (e.g. number of stakeholders, degree of involvement, financial indicators, ratios) by expert estimation, with the involvement of an external consultant and the Bank's ESG division. The positive or negative sign, as well as the degree (on a -3 – 3 scale of 7) of each impact was established. The financial impacts on the Group of the impacts identified from the aspect of sustainability and the relevance of the GRI indicators affecting the various materiality areas were determined with the help of the ESG Subcommittee. GRI 2-14 The result of the materiality analysis was approved by the ESG Committee. INTEGRATED ANNUAL REPORT 2022 82 OTP BANK BUSINESS REPORT 2022 (CONSOLIDATED) GRI 3-2 The OTP Group's material sustainability topics are those appearing against orange background in the chart. Material topics in the previous year's report of the OTP Group: • Socio-economic compliance • Anti-corruption • Economic performance • Preventing anti-competitive behaviour • Marketing and labelling • Protection of personal data • Market presence • Non-discrimination • Public policyIndirect economic impacts • Training and education • Labour/management relations • Occupational health and safety • Security practices • Product portfolio (sector-specific) • Employment • Local communities Diversity and equal opportunity BUSINESS MODEL GRI 2-6 OTP Group’s business model is focused on offering high-quality financial services to retail, private banking, micro and small business, medium and large corporate, as well as municipality clients through both the Group’s branch network, the steadily developing digital and other remote service channels, as well as through agents and other contractual partners. At the end of 2022, OTP Group served around 15.7 million clients. The aim of the Group is to keep on developing its services in the era of continuous digital and technological advancement, in order for these services to be accessible to the widest possible scope of clients, in a simple, easy and safe manner. Beside digitalisation, the Group has been putting particular emphasis on sustainability, targeting the avoidance of negative impacts on our environment and society, and the harnessing of business opportunities at the same time. The Bank has been playing an active role in the development of households’ financial literacy, cultural enrichment, conservation of environmental values and fostering equal opportunity. INTEGRATED ANNUAL REPORT 2022 83 OTP BANK BUSINESS REPORT 2022 (CONSOLIDATED) Regarding geographical footprint, the Group is present in 11 countries in the Central and Eastern European region. The mother company of the Group, OTP Bank Plc. (referred to hereinafter as Bank) is the leading financial institution in Hungary. Apart from Hungary, the Bank owns foreign subsidiaries in altogether 10 countries in Central and Eastern Europe through capital investments, typically holding 100% or close to 100% share in those affiliates. Amongst foreign operations, OTP also holds market leading position in Montenegro, whereas in Bulgaria, Serbia and (on a pro-forma basis) Slovenia the Bank is the second largest player based on total assets. Our Moldavian bank holds the No. 3 position, while our Croatian operation is the 4th largest on the local banking market. The Bank and its foreign subsidiary banks provide comprehensive banking and other financial services to both retail and corporate customers: the Group’s activities include deposit collection from customers and raising money from the money and capital markets; on the asset side, OTP Bank offers mortgage loans, consumer credits, working capital and investment loans to companies, as well as loans to municipalities. Depending on the balance sheet structure of the given entity, Group members invest their liquidity reserves in money and capital market instruments, or resort to intragroup funding. Moreover, Group members provide a wide range of state-of-the-art services, including wealth management, investment services, payment services, treasury and other services. However, there are differences amongst Group member banks with respect to their business focus, the range of offered products and services and the distribution channels, too. As for the business mix, while in most countries of the Group the weight of retail, as well as corporate and leasing volumes shows a relatively balanced picture, the share of corporate and leasing exposures is close to 90% within the total stock of loans, whereas in Russia the weight of consumer loans exceeds 90%. In both countries, mortgage loans represent a negligible portion in the loan book. INTEGRATED ANNUAL REPORT 2022 84 OTP BANK BUSINESS REPORT 2022 (CONSOLIDATED) ESG STRATEGIC DIRECTIONS In the long run the OTP Group is a champion of green and just transition in the Central and Eastern European Region, wishing to be a responsible partner of every single stakeholder, with a commitment to manage the environmental and social impacts of its business operation. We integrate social and environmental risks, and economic considerations, in our business decisions, operation and business development. Vision Responsible financial decisions and socially and environmentally adequate, ethical financial solutions are available for all economic participants and citizens in all of the countries covered by the OTP Group's operations. Mission For us, sustainability means taking responsibility for our economic, social and environmental impacts. We firmly believe that by our leading role in the Central and Eastern European Region, with our pioneering developments, conscious and ethical business operation and exemplary partnerships we create value and contribute to a sustainable future. ESG strategy ST6, 305: 3-3, TCFD II.a,b, IV.c The Management Committee adopted the OTP Group’s ESG Strategy by a unanimous decision in 2021. The strategy rests on the following three pillars: responsible service provider, responsible employer and responsible social actor. Along with business opportunities, the strategy includes the management of the relevant risks, as well as social and corporate governance goals. The time horizon of the strategy covers the period until 2025: by that time, our objective is to implement the comprehensive ESG integration at Group level. Strategic goals Long-term KPIs for the OTP Group End-2022 profit/loss Responsible service provider • • • products green solutions facilitating the green transition of the economy and products and investment services to facilitate the investments sustainable economy active ESG risk management into Green loans of a total of HUF 1,500 by 2025 The goal set for 2022 – a portfolio of HUF 230 billion – was accomplished Responsible employer • • active ESG management practices in corporate governance strengthening employee well-being and development, diversity and employee engagement Responsible social actor • • strongly reducing emissions from our own operation significant contribution to social through objectives responsible products and services and through donations and SDGs Steady increase in the level of employee engagement, reach a global 75 percentile at a group level (in 2022: 78%) to The level of employee engagement was 70% at a group level Net carbon neutrality by end-2022 (goal met), total carbon neutrality by 2030 for OTP Bank The goal was accomplished8 OTP Bank will become a member of the S&P Dow Jones Sustainability Index by 2025 The Bank's profit increased by 8 percent year-on-year in 2022. The subsidiary banks worked out their respective ESG strategies in 2022, setting out their own objectives – aligned with those of the parent bank. The strategies cover segments such as risk management, the 8 the 2022 emission levels have been pre-determined, so there are residual emissions (see @CO2 emission) INTEGRATED ANNUAL REPORT 2022 85 OTP BANK BUSINESS REPORT 2022 (CONSOLIDATED) development of green products, the organisational frameworks, social matters and reducing their operations' environmental impacts. They identified KPIs with which to measure the success of implementation. They review their plans once a year in the context of their ESG reports, of which they also keep OTP Bank's BoD informed. As a consequence of the war between Russia and Ukraine these two subsidiaries and OTP Bank Moldova have not prepared their strategies so far. UN PRB It was in late 2021 that OTP Bank signed the United Nations Principles for Responsible Banking (UN PRB), a single framework for a sustainable banking industry. The Principles provide a framework to ensure that banks' strategies and practices conform to the future vision outlined in the UN's sustainable development goals and the Paris Agreement. The Group's Serbian and Romanian subsidiaries plan to sign in 2023. OTP Bank fulfils its PRB reporting obligation for the first time in this report, in the Reporting and Self- Assessment Template. GRI 2-6 Summary ESG data of the OTP Group (2022) @Percentage of women on the Supervisory Board @Percentage of women on the Board of Directors @Percentage of women in top management @Amount donated Number of customers – total Number of retail customers Number of corporate customers @Young customers5 @Micro and small enterprise assets @Medium and large corporation assets @Percentage of accessible branches and customer offices @Customer satisfaction (TRI*M)6 @Number of participants in the financial education trainings of OK Educational Centres @Number of employees (active, as at 31.12) @Percentage of women @Female-to-male earnings ratio (in the same job category) @Turnover Turnover (excluding agents employed) @Average training hours @Employee satisfaction/engagement @Energy consumption (GJ) @Energy consumption per employee (GJ) @CO2 emission (Scope 1+2, tCO2e) – market-based @CO2 emission (Scope 1+2, tCO2e) – offset @CO2 emission per employee (tCO2e) – market-based @CO2 emission per sales revenue (tCO2e/million HUF) @Total paper consumption (tonnes) 1 Consolidated data for the Boards of Directors of the parent bank and subsidiary banks. 2 Consolidated data for the parent bank and subsidiary banks. 3 OTP Core 4 Consolidated by country. 5 As a percentage of retail customers. 6 On a scale of -66 to 134 points, national data. OTP Bank 17% 9% 0% HUF 2.5 billion 4.6 million3 4.2 million3 0.4 million3 18% HUF 570 billion3,4 HUF 2.772 billion3,4 99% 66 points 29,307 OTP Group 24% 20%1 23%2 HUF 4.0 billion 15.7 million 14.8 million 0.9 million 11% HUF 874 billion HUF 7.820 billion 78% varies by country 35,237 10,516 69% 98.57% 12.2% 12.2% 80 76% 268,934 26.17 7,675 675 0.75 0.014 1,053 38,775 64% 90.47% 26.9% 20.4% 35 70% 1,091,006 29.22 73,701 66,701 1.97 0.044 3,554 INTEGRATED ANNUAL REPORT 2022 86 OTP BANK BUSINESS REPORT 2022 (CONSOLIDATED) 1. ESG GOVERNANCE, RESPONSIBILITIES GRI 2-9, 2-12, 2-13, TCFD I.a,bThe ESG Committee is a standing committee set up by the Bank's BoD, whose chair is appointed by the Chairman and CEO from the members of the BoD and whose members include OTP Bank's the Deputy CEOs and elected directors. The Committee's tasks are to • • • • identify ESG business opportunities and risks within the Bank and the Banking Group; formulate the strategy, plans and policies related to ESG; take responsibility for setting and evaluating ESG and performance targets and support the Bank's governing bodies in the performance of ESG-related tasks. The Committee is collectively responsible for the implementation of the Bank's ESG transformation. The ESG Committee cooperates with individual domains of the Bank in the process of ESG business transformation and in the management of ESG risks, and aspires to enforce ESG criteria in product development, pricing and planning, as well as in the corporate governance activity. The Board of Directors is provided with a comprehensive report on the implementation and furtherance of OTP Bank's ESG strategy. GRI 2-13, 2-17 The ESG Committee established the ESG Operational Subcommittee, which meets regularly for its professional and operational support and as a pre-decision making forum. The head of the Subcommittee – who is also the leader of the ESG business transformation – is the director of the Green Program Directorate. GRI 2-19 Compliance-conscious operation and CSR each makes up at an at least 5 percent share of the targets set out for each of OTP Bank's Chairman & CEO, Deputy CEOs and executive directors. These two elements comprise the satisfaction of sustainability criteria as well. Sustainability targets are also among the performance-based incentives of the managing directors of all foreign subsidiary banks. A number of standing committees are directly involved in the management of the Group's environmental, social and economic impacts. They are discussed in the @Responsible Corporate Governance Report. GRI 2-12, 2-16 The Board of Directors and the Supervisory Board are kept informed by regular (annual, semi-annual) reports from the various committees and divisions. The members of the managing bodies can access the documents of all of the committees and boards, and can ask any division of the bank for information through the Management Information Portal. No critical stakeholder remarks were made in 2022; nonetheless, the governing bodies are provided with information on feedback from stakeholders, including employees, customers and shareholders: • Reports are prepared for the Supervisory Board on the process and results of the OTP Group level engagement survey. • The Compliance Directorate prepares quarterly reports to the Board of Directors, in accordance with the MNB Recommendation on Internal Lines of Defence. • Semi-annual reports are prepared for the BoD and the SB on customer complaints and the lessons drawn from their management as well as the MNB's consumer protection audit. They were also informed about customer complaints received by the foreign subsidiaries. GRI 2-9 OTP Bank's Supervisory Board, Board of Directors and standing committees had a total of 129 members on 31 December 2022. Some of them are members of more than one bodies. 27 of the members are independent9 and 10 of them are women. There are a total of three employee delegates in the Supervisory Board and the Ethics Committee. The Supervisory Board, the Board of Directors, the Audit Committee, the Remuneration Committee, the Nomination Committee and the Management Committee are also described separately; information on their members, their other important positions and engagements is to be found in their respective CVs. Other committees, with the exception of the Risk Assumption and Risk Management Committee, are – by virtue of their tasks – made up nearly exclusively of OTP Bank managers; their members do not have any other external important positions or engagements. The primary criterion in the selection of the committees' members is professional expertise. 9 According to the @definition of independence they do not, at the same time, fulfil any managerial position at OTP Bank. INTEGRATED ANNUAL REPORT 2022 87 OTP BANK BUSINESS REPORT 2022 (CONSOLIDATED) For information on OTP Bank's organisational structure and governance levels see its @ organisational chart. GRI 2-13, 3-3, TCFD I.b The governance and regulation of individual sustainability and ESG domains are implemented as follows: ESG / sustainability domain Compliance: - responsible corporate governance, - non-discrimination, - consumer protection - anti-corruption (ABC), - international requirements, sanctions - processing and protection of personal data, - business ethics, conflict of interest whistleblowing the (including system) Responsibility, manager compliance, of terms governance In and organisational responsibility lies with the Board of Directors and the Supervisory Board. Compliance officer, consumer protection officer: Executive Director the Compliance Directorate heading Manager responsible for the Bank’s data processing and the protection of customers’ personal data: Deputy CEO of the Digital Division and the data protection officer top management of the controller or the processor, not accepting instructions from anyone regarding the discharge of their duties) Ethics Committee: guidance, second-tier decision- making regarding reports of ethical offences (reporting directly the to Policy References @ Compliance Policy: - approved by: Board of Directors - declares the requirement to observe the law, the directives and guidelines of national and international supervisory authorities and the internal regulations; its Annexes: - @ Consumer Protection Compliance Programme - @ Anti-Corruption Policy - @ Sanctions Policy - @ Financing services related to the defence sector - GRI 418: 3-3 @ Data Protection Policy @ reporting, monitoring, measures @ risk assessment @ data protection training @ fraud GRI 2-23 @ Code of Ethics - approved by: Board of Directors reporting @ training ethical offences, statutory reporting - regular to supervisory and other government bodies Security: - overall security, - cybersecurity - protection from money laundering and terrorist financing Heads of division and managers of regional profit centres Responsibility for security rests with the Board of Directors and the Supervisory Board. Manager responsible for compliance with IT security and bank security requirements: Managing Director of the IT and Bank Security Directorate Security policy: - approved by: Board of Directors - sets forth the principles and main guidelines concerning security at the Bank, - declares the Bank’s commitment to maintaining and preserving security at all times. Anti-Money Laundering Committee: decisions on sustaining business relationships within its competence high-risk creating or Group Information Security Policy: - approved by: CEO - it declares the directions of development and relevant requirements Group Cyber Defence Strategy @ Anti-money laundering @ reporting, risk assessment @ training @ fraud INTEGRATED ANNUAL REPORT 2022 88 OTP BANK ESG / sustainability domain Risk Management: - all risk types Green finance: Product development, sales: Human resource management: - HR overall, - diversity and equal opportunity, of the cornerstones they monitor Responsibility, manager Audit Committee and Risk Exposure and Risk Management Committee: risk management activity. Risk Committees (Credit and Limit Committee, Work- out Committee, Group Operational Risk Management Committee): ultimate decision-making competence risk management the on methodologies. Officer in charge of risk management: Deputy CEO responsible for the Credit Approval and Risk Management Division Green Programme Directorate: Supporting all members of OTP Group in taking maximum advantage of the opportunities in green financing. Product Development, Sales and Pricing Committee: adopts decisions applicable to OTP Bank and the Hungarian group members on the development, introduction, discontinuation, pricing and terms of new schemes and product variants, and on sales and incentives. Approves plans for image campaigns and for advertising specific banking schemes. International Product Development, Sales and Pricing Committee: approves the annual action plans of foreign subsidiaries. responsible Manager resource management: Executive Director heading the Human and Organisation Development Directorate human for - occupational health and safety Manager responsible for health and safety: Managing Director of the Property Investments and Supply Chain Directorate Procurement/purchasing - expectation of ethical conduct, - sustainability, environmental criteria The procurement activity is performed by the requesting organisation. BUSINESS REPORT 2022 (CONSOLIDATED) Policy References Risk Assumption Strategy: - approved by: Board of Directors - defines the risk management framework and the principles and guidelines for risk assumption. @ESG strategy @ Compliance Policy: - approved by: Board of Directors - declares that, in designing its products and services, the Bank pays special attention to the enforcement of consumer protection principles, and information to asymmetry between customers and the bank. reducing the The @Consumer Protection Compliance Programme constitutes an annex to the policy Accessibility strategy: - the goal is to ensure equal opportunity in service. HR strategy: - approved by: Management Committee - determines the medium-term areas of focus for human resource management. @Diversity Policy: commitment to diversity among the members of management bodies and management. @Strategy to create Gender Equality Health and Safety Regulation: - approved by: Chief Executive Officer - uniform and comprehensive preventative health and safety strategy to implement safe working conditions that do not constitute a health risk. Procurement policy: - approved by: CEO - regulates the procurement process, spheres of responsibility, procurement principles; stipulates that the procurements of members of the Banking Group are supervised and coordinated by OTP Bank. @ rules, functions @ exclusions @ lending lending @ operational risk assessment @ debtor protection policy, responsible @ objective, clear information @ responsible selling @ responsible products @ accessibility @ turnover @ training @ income @ freedom of association @organisational diversity @ reporting, risk assessment, training, accidents @ rules @ materials used INTEGRATED ANNUAL REPORT 2022 89 OTP BANK ESG / sustainability domain Environmental protection: - environmental operations, - environmental procurement protection awareness BUSINESS REPORT 2022 (CONSOLIDATED) Responsibility, manager The Chairman & CEO is responsible for the Bank’s environmental protection activities. Manager responsible for supervising environmental protection activities: Managing Director of the Property Investments and Supply Chain Directorate in in Policy Environmental Code: - approved by: CEO - ensures legal compliance and facilitates the consideration of environmental criteria and their integration into the Bank’s business operations in order to minimise the environmental impacts of operating and maintaining the Bank’s organisation; it sets out the guidelines on environmentally aware procurement. References @ reporting, training @ CO2 Emission INTEGRATED ANNUAL REPORT 2022 90 OTP BANK BUSINESS REPORT 2022 (CONSOLIDATED) 2. ENVIRONMENTAL AND SOCIAL IMPLICATIONS OF FINANCIAL SERVICES GRI 3-3, 203-2 Impacts10: Social impacts and indirect economic impacts of lending, Indirect economic impacts of investments: By way of responsible placement of customers' funds enabling consumption and investment projects through lending and investment. Impact on the population's living standards, contribution to the achievement of housing objectives, to the development of businesses and the economy as a whole and, indirectly, facilitating job creation. The impacts might even be negative as the case may be, through excessive indebtedness and/or consumption. Financing of high social risk sectors: The risk of negative social impacts is potentially higher in the case of these funded activities, which however, can be mitigated by prudent lending. The environmental impacts and GHG emission, Investments' environmental impacts and GHG emission: Both lending and investment involve the use of environmental resources and the emission of greenhouse gases. Their extent largely depends on the attributes of, and the efforts made towards mitigation by, the organisation or individual performing the activity. Green loan products, Green investment products: Such products provide funding for activities having positive environmental impacts, facilitating their growth/expansion. The positive impact can occur if activities generating actual environmental benefits are financed. Objectives: Making funds accessible for businesses and residents of the region Prudent service provision and lending Supporting the long-term sustainable progress of society and the economy Regional leader in green transition Helping access to basic needs Avoiding, alleviating potentially negative impacts Acts: Active lending in the region Strict, conservative risk management by integrating ESG risks Ethical and fair product design Debtor protection programmes Active role in national and international programmes Products for vulnerable social groups (among others, the youth and pensioners) Serving the financial needs of micro, small and medium-sized businesses at a high standard of quality Supporting the transition to green economy and a low-carbon economy Stakeholder involvement/compliance: reviewing customer feedback/exploring their needs, cooperation with international institutions in relation to product facilities, compliance with regulations, Disclosure of ESG strategic objective For further information visit our @website. 10 With a focus on material topics. INTEGRATED ANNUAL REPORT 2022 91 OTP BANK BUSINESS REPORT 2022 (CONSOLIDATED) 2.1. Sustainable finance framework It was in 2022 that the OTP Group adopted its group-wide Sustainable Financial Framework, in line with its broader corporate responsibility strategy – covering the social element of sustainability –- after the adoption of the parent company's green lending framework (2022) and OTP Jelzálogbank's green mortgage bond framework (2021). OTP Bank was the first company in Hungary to issue green bonds in 2022. GRI 201-2 The purpose of the creation of the @framework – on which an external expert issued its opinion11 – was to enable the Banking Group to issue financial instruments to finance and refinance projects facilitating the transition to a low-carbon and climate change resilient economy and/or have positive social impacts and alleviate social problems. The OTP Group is committed to encouraging sustainable business operations in the industries and regions in which it is present. By issuing sustainable financial instruments the Banking Group ensures increased transparency regarding supported projects and assets generating environmental and social benefits, potentially facilitating additional investments into environmentally and socially sustainable assets which contribute to the achievement of the targets set out in the SDGs enshrined in the Paris Agreement as well as those established by the UN. The Bank and any of its subsidiaries may issue green and social financial instruments, including bonds and medium term units under the framework (sustainable financial instruments). The framework was worked out on the basis of the ICMA12 Green Bond Principles, 2021; the ICMA Social Bond Principles, 2021, the LMA13 Green Loan Principles, 2021 and the LMA Social Loan Principles, 2021. Sustainable financial instruments cannot be used for financing loans relating to fossil power generation, nuclear power generation, arms and defence, mining, gambling or tobacco. Eligible green categories14: • • • green buildings, renewable energy, clean transportation. Eligible social categories: • job creation, programmes aimed at preventing and/or alleviating unemployment resulting from social and economic crises, including cases taking place through potential impacts of the financing and microfinancing of SMEs. OTP Group reports to investors within one year of the date of the transaction relating to the sustainable financial instrument and thereafter once a year until the complete allocation of the revenues. No such allocation and impact assessment report has so far been prepared for 2022. In the summer of 2022 OTP Bank was the first bank in Hungary and one of the first ones in the Central and Eastern European region to issue green bonds in a total amount of EUR 400 million (HUF 155.8 billion), for a 5.5 percentage return. The Bank uses the funds so raised for financing part of the green loans in its books. The green loans were issued in Hungary and the Balkan countries in which we have subsidiaries, renewable energy, sustainable real estate and mobility (primarily electro-mobility) projects (see subsection @2.2). The use of the funds is strictly regulated under the Sustainable Financing Framework; for instance, real estate projects have to meet energy efficiency requirements, while renewable energy projects must not exceed the applicable whole life cycle CO2-emission limits. OTP Jelzálogbank releases the key financial and environmental impact data relating to the green mortgage bond it issued in 2021 (allocation report) once a year on its @website. The first such report was prepared in 2022. The mortgage bonds – of a total of HUF 95 billion – enable the saving of 45 GWh (163 thousand GJ) energy and the avoidance of the emission of 10 thousand tonnes of carbon dioxide per year. 11 SPO: Second Party Opinion 12 International Capital Market Association 13 Loan Market Association 14 The precise criteria are specified in the framework. INTEGRATED ANNUAL REPORT 2022 92 OTP BANK BUSINESS REPORT 2022 (CONSOLIDATED) 2.2. Green products GRI 201-2, ST6: 3-3, TCFD II.a,b, IV.a,c One of the most important goals of OTP Bank's ESG strategy is for the OTP Group to be a regional leader in the funding of just and gradual transition to a low carbon economy and in building a sustainable future by offering a balanced financing products and services. In 2022 the Group considerably expanded its green loan portfolio. The subsidiary banks have set their goals regarding the sizes of their green loan portfolios – as part of their respective ESG strategies – which were approved by OTP Bank's ESG Committee in 2022. OTP Bank was the first financial institution in Hungary to prepare its green lending framework to regulate the Bank's green lending activities. Its aim is to identify projects enhancing positive environmental impacts and reducing negative ones as well as helping businesses and societies adapt to the impacts of climate change. The framework introduced a number of categories making it possible to identify the green lending activities pursued by OTP Bank. The criteria are based on the EU Taxonomy Regulation and the Taxonomy of the Climate Bond Initiative, therefore they are more complex than the guidelines of the @Sustainable FinanceiFramework. The Green Lending Framework – supported by an external expert opinion as well – was approved by the Mational Bank of Hungary (MNB) on 16 March 2022 and is available on the Bank's @website. transaction-specific the Bank will environmental/social/governance requirements and criteria to be met during the entire term of the each contract, in order to encourage the highest possible level of sustainability of the transactio ns concerned. green loans down also For the lay The OTP Group met its target: by end-2022 the amount of its green loan portfolio reached HUF 266 billion. Our goal is to continue to increase the portfolio towards the 2025 target laid down in the ESG strategy, and to extend the green lending framework to the whole of the Group in 2023. Disclosure according to the Taxonomy Regulation The mandatory disclosures of the OTP Group and the banks operating in EU Member States under Regulation (EU) 2020/852 (Taxonomy Regulation) are listed in the following table. Simplified disclosure is on a consolidated basis, for the Group as a whole, and the carrying values of the exposures are as of the reference date of 31 December 2022. Article 10(3)(a), Article 10(2)(a), Article 10(2)(b) Article 10(2)(c), Article 10(2) Article 10(2) Article 10(2)(b) Article 10(3)(a), Article 10(3)(a), Article 10(3)(a), Article 10(3)(a), Disclosure as per the delegated regulation relating to Article 8 of the Taxonomy Regulation OTP Group consolidated The proportion in their total assets of exposures to Taxonomy-eligible economic activities * The proportion in their total assets of exposures to Taxonomy non-eligible economic activities * Proportion in their total asset of derivative transactions * Proportion in their total asset of exposures to undertakings that are not obliged to publish non-financial information pursuant * Proportion in their total asset of on demand inter-bank loans * Proportion in their total asset of the trading portfolio Proportion of exposures to central governments, central banks and supranational issuers DSK Bank: The proportion in their total assets of exposures to Taxonomy-eligible economic activities * OTP Bank Croatia: The proportion in their total assets of exposures to Taxonomy-eligible economic activities * SKB Bank: The proportion in their total assets of exposures to Taxonomy-eligible economic activities * OTP Bank Romania: The proportion in their total assets of exposures to Taxonomy- eligible economic activities * 10.79% 22.74% 1.11% 41.22% 5.90% 0.31% 24.00% 16.30% 2.54% 11.13% 31.98% INTEGRATED ANNUAL REPORT 2022 93 OTP BANK Article 10(3)(d), BUSINESS REPORT 2022 (CONSOLIDATED) Disclosure as per the delegated regulation relating to Article 8 of the Taxonomy Regulation Annex XI, quality information Contextual information in support of the quantitative indicators including the scope of assets and activities covered by the KPIs, information on data sources and limitation: Exposures to eligible economic activities include retail exposures contained in the banking book (limited to loans covered by residential real estates or home renovation loans and to motor vehicle financing), in observance of the restrictions specified by the applicable statutory regulations. The following categories of residential real estates were taken into account: Modernisation of existing buildings (7.2)15 Commissioning, maintenance, repair and modernisation of energy efficiency equipment (7.3)15 Commissioning, maintenance and repair of charging stations for electric vehicles inside buildings (and in parking places belonging to buildings (7.4) 15 Commissioning, maintenance and repair of instruments and equipment for measuring, regulating and controlling the energy efficiency of buildings (7.5) 15 Commissioning, maintenance and repair of renewable energy technologies (7.6) 15 Purchase and ownership of buildings (7.7) 15 In the retail motor vehicle financing segment only motor vehicle loans provided from the first day of the application of the disclosure requirements, for the sub-categories specified in the technical filtering criterion. In relation to exposures to non-financial undertakings the disclosures referred to in Article 8 (4) of the Taxonomy Regulation must be based on actual information received from the companies concerned; if however, no such data are available, the financial undertaking may take the option under which it estimates the ratio of the eligible economic activities as part of their voluntary financial statements. In the segment of non-financial undertakings the exposures to eligible activities were examined on the basis of the applicable NACE codes. Listed companies with more than 500 employees were considered as coming under the scope of the NFRD. * Without the exposures to be eliminated from the KPI nominators according to the Regulation. Explanations of the nature and objectives of Taxonomy-aligned economic activities and the evolution of the Taxonomy-aligned economic activities over time, starting from the second year of implementation, distinguishing between business-related and methodological and data-related elements; This time we focused on Taxonomy-eligible activities. Our goals relating to green financing and the activities we have implemented are discussed in the textual descriptions outside the table. Description of the compliance with Regulation (EU) 2020/852 in the financial undertaking’s business strategy, product design processes and engagement with clients and counterparties Our goals relating to green financing and the activities we have implemented are discussed in the textual descriptions outside the table. For credit institutions that are not required to disclose quantitative information for trading exposures, qualitative information on the alignment of trading portfolios with Regulation (EU) 2020/852, including overall composition, trends observed, objectives and policy; This time we focused on Taxonomy-eligible activities. Additional or complementary information in support of the financial undertaking’s strategies and the weight of the financing of Taxonomy-aligned economic activities in their overall activity. This time we focused on Taxonomy-eligible activities. Our goals relating to green financing and the activities we have implemented are discussed in the textual descriptions outside the table. Indicators identified by OTP Bank as part of voluntary reporting We have reviewed the Banking Group's corporate portfolio from the aspect of the Taxonomy Regulation's climate change mitigation and climate change adaptation goals on the basis of the NACE codes that can be particularly assigned to the activities specified in the delegated acts 16 The OTP Group's corporate lending activity in relation to Taxonomy-eligible activities is linked to environmentally sustainable economic activities in the EU Member States in the following ways and to the following extents.17 The proportion in the total assets of the Taxonomy-eligible corporate portfolio, coming under the scope of the NFRD: 0.39%. The proportion in the total assets of the Taxonomy-eligible corporate portfolio of the Core and subsidiary banks operating in the territory of the European Union is 8.73%. The proportion in the total corporate portfolio of the Core and subsidiary banks operating in the territory of the European Union, of the Taxonomy-eligible corporate portfolio of the Core and subsidiary banks operating in the territory of the European Union is 44.10%. 15 Pursuant to the EU Taxonomy Regulation 16 According to the delegated act on environmental goals published in the EU Official Journal on 9 December 2021. 17 The exposures under review are limited to the following: OTP Nyrt, DSK Banka EAD, OTP Bank Romania S.A, OTP banka Hrvatska d.d, SKB banka d.d. INTEGRATED ANNUAL REPORT 2022 94 OTP BANK BUSINESS REPORT 2022 (CONSOLIDATED) Green lending activity strengthened during 2022 in both the retail and the corporate segments. OTP Bank clarified in 2022 the requirements and conditions pertaining to the various green products and created an internal green loan registry system which enables more accurate identification and statistics. Green products are planned to be developed in several business divisions in 2023. Quantitative green portfolio KPIs will be prescribed for the group as a whole in 2023. Corporate lending OTP Bank's 2022 Corporate Lending Policy added the financing of green energy generation to the preferred category. The list of the projects financed by the Group, planning to generate at least part of their income from selling electricity on the free market, increased. The renewable energy sector accounted for some 30 percent of new project financing transactions. Contracts for as many as four new renewable energy transactions were concluded in 2022 in the project financing division – at a group level – in a total amount of HUF 55.0 billion, of which OTP Bank's share amounted to HUF 34.8 billion. The projects utilise wind and solar energy and biomass. The placements took place in Hungary, Bulgaria, Croatia and Serbia. The projects concerned have a total combined renewable energy capacity of 248 MW. The total capacity of the renewable energy projects in the portfolio was 1,183 MW at end-2022. About 50% and 25% of the projects were solar and wind farms, respectively, the remaining projects financed by the Banking Group were utilising biomass or hydraulic energy. The projects concerned are financed for the most part by the OTP Group – only a handful of them are funded with the involvement of third parties. The Bank paid particular attention to dealing with the real estate sector in 2022. In office development financing most transactions do have green certification, which the Bank takes into account as a positive factor in credit scoring. The Group's corporate green loan portfolio amounted to HUF 160 billion at the end of 2022. A significant part of the green loan segment of corporate lending is made up of corporate green bonds in Hungary. Moreover, Merkantil Bank's portfolio comprises a significant proportion of green loans in the leasing product called new electric vehicles. OTP Bank aims to create programmes for energy rationalisation in every segment. In the category of investments generating environmental benefits, energy efficiency improving and energy cost cutting projects, that could be implemented with short payback periods in the market and economic environment of 2022, were most in demand last year. In Hungary, energy efficiency and renewable energy projects were provided with particularly high rates of support through the state-subsidised Széchenyi Investment Loan MAX scheme. The product became available at OTP Bank from August and part of them, meeting its requirements, were also accounted for in the MNB's Green Preferential Capital Requirement Programme. OTP Bank also launched a green financing pilot project in connection with the green loan purposes with the aim of gathering experience concerning the practical application of the green lending guidelines. About half of the transactions implemented in the pilot related to energy generation and energy efficiency, about a third of them to real estate development and some to the procurement of equipment for irrigation development, forestation and precision cropping. INTEGRATED ANNUAL REPORT 2022 95 OTP BANK BUSINESS REPORT 2022 (CONSOLIDATED) The OTP Group provides its customers with funding in the context of the European Union's New Common Agricultural Policy as well, where environmental and climate protection efforts must be taken in consideration on a mandatory basis. Loans provided in connection with the Rural Development Programme also promote environmental purposes, for instance by supporting precision farming projects required for the digital transition of the economy, the development of the agricultural water management sector or the transition to organic farming. Through its Green Corridor service OTP Bank offers pre-financing and co-financing, facilitating the utilisation of support under the Rural Development Programme through a simplified lending process. We give a bank guarantee for drawing down the subsidy advance, pre-finance the remaining amount of the subsidy, and extend an investment loan to cover any gaps in own funds; the loan is offered against a low own funds requirement and attractive collateral terms. A total of 16 new contracts were concluded under the Green Corridor service in a total amount of HUF 4.25 billion in 2022. In connection with the Rural Development Programme the Bank provided financing for a total of 42 transactions in an amount of HUF 23.2 billion. The transactions relating to the Rural Development Programme cannot be separated within the portfolios of the subsidiary banks. (These loans are not included in the green loan portfolio because they are not provided exclusively for environmental purposes.) The subsidiary banks' typical green loan products are described below: BG More than 150 loans provided specifically for renewable energy utilisation and energy efficiency improvement are comprised in the Bulgarian subsidiary's portfolio. About 80 new transactions were concluded in 2022 for solar panel farm construction – of a total capacity of about 200 MW. The Regional Urban Development Fund manages European Union funds within the Regional Development and Growing Regions Operational Programmes. The subsidiary provides financing through the Fund for improving the energy efficiency of public buildings (e.g. community centres, stadiums, swimming pools, historic buildings) and for purchasing transportation vehicles in the larger cities of Bulgaria and in Northern Bulgaria. The Fund is obliged to report on the expected annual greenhouse gas emission savings. HR The Croatian subsidiary bank provides loans for condominiums' energy efficiency improvements. Even the Environmental Ministry provides subsidies for about 10 percent of the loans. RS The Serbian subsidiary bank's green loan portfolio is focused on the electrification of the railway network. Loans are also provided for real estate energy efficiency projects and renewable energy projects. The Bank signed a loan agreement with the EBRD (European Reconstruction and Development Bank) in 2022; the credit facility stipulated in the agreement can be used for the financing of green loans in line with the EBRD's green financing principles. Moreover, the Bank is actively seeking for possibilities for involving funds of IFIs (International Financing Institutions) in green lending. SI SKB Bank provided funds for electro-mobility and solar panel development in 2022. RO OTP Bank Romania participated in financing the GreenWEEE electronic waste recycling plant project. Moreover, its portfolio comprises the financing of green certified office. After its 2021 campaign the Romanian leasing firm launched yet another Green Leasing campaign to promote the procurement of electric and hybrid cars. MD After the successful closure of the earlier EU4Business programme the Moldavian subsidiary launched new cooperation in the context of the SME Competitiveness Programme in the Eastern Partnership (EaP SMEC). The financing facility promoting micro, small and medium-sized enterprises' long term projects is aimed at enabling the development of productive processes and equipment and at least 70 percent of the loans is used for green technologies. Retail loans The year-end green loan portfolio amounted to HUF 106 billion.18 The Green Home Programme (GHP) launched in late 2021 was highly popular therefore the National Bank of Hungary (MNB) increased the original HUF 200 billion limit by another HUF 100 billion, tightening at the same time the energy efficiency criteria. OTP Bank concluded contracts for a total of HUF 175.4 billion during the entire programme, securing a 60 percent market share. The programme enabled customers to apply for a preferential (max. 2.5%) fixed-rate loan for the purchase or construction of newly built residential property with an energy efficiency rating of at least BB and a primary 18 This amount comprises only the Hungarian portfolio already accounted for towards the MNB in the latter's Green Preferential Capital Requirement Programme in the case of which the disbursed amount is slightly higher, and it does not include the mortgage loan portfolio dedicated to energy efficient real estates financing not included in the Green Home Programme. INTEGRATED ANNUAL REPORT 2022 96 OTP BANK BUSINESS REPORT 2022 (CONSOLIDATED) energy consumption threshold of 90 kWh/m2 (after the limit increase: 80 kWh/m2) per year. The MNB provided refinancing at a 0 percent interest rate for credit institutions participating in the pr ogramme. The foreign subsidiaries worked on the preparation of retail green lending in 2022. BG DSK Bank introduced a preferential mortgage loan product – charging no approval fee – in late 2022 for residential real estates of energy efficiency category BB or better. RO It has been since December 2022 that the Romanian subsidiary bank has been collecting energy efficiency data in connection with new housing loans to enable identification of the proportion of green loans. HR The Croatian subsidiary bank is financing energy efficient purchases (of electric, hybrid and plug-in hybrid vehicles) together with the Environmental and Energy Efficiency Fund. Other green services So-called MFB Points have been present in Hungary since 2017 in OTP Bank branches, intermediating the Hungarian Development Bank's (MFB) products funded by the European Union and MFB itself. We operated a total of 167 MFB Points in 2022 (in 47 percent of our branches). Schemes designed for the retail and corporate clientele were also available at MFB Points. The loans available to individuals, condominiums and housing associations are intended specifically for environmental protection purposes: we offered the EU-refinanced interest-free loans until the end of 2022 for energy efficiency and renewable energy consumption projects under the Széchenyi 2020 programme. The number of newly concluded contracts decreased significantly in 2022, to 195 and a total amount of HUF 647 million. Between 2017 and 2022 we intermediated loans under this scheme at a total value of HUF 42.6 billion. BG DSK Bank joined Mastercard's Wild Life Impact programme in 2021 – the DSK Mastercard Wildlife Impact deposit card was brought out in 2022. The joint initiative is aimed at protecting endangered animal species from extinction. Upon the issuance of every new card the Bank and Mastercard contributes one dollar to the costs of protecting and restoring natural habitats. For awareness raising the card's expiry date is the same as the date by which the endangered species featured on the card is expected to go ext inct. The use of recycled and recyclable material for the manufacture of the card results in a 63 percent reduction in emissions in comparison with conventional bank cards. The bank supported the issuance of the card with an extensive biodiversity communication campaign, and it also sponsors the Sofia Zoo's conservation programme. The business objectives set for the programme have been achieved: the number of deposit card contracts increased by 15 percent year-on-year, among other things. RS As a member of the Mastercard Priceless Planet Coalition the Serbian subsidiary bank always plants a tree whenever a new account is opened or when the Google Pay or the Apple Pay service is activated for an existing account. They planted as many as 15 thousand trees in 2022 by donating HUF 12 million. Be free! UA The Ukrainian subsidiary bank launched a prize game for its deposit holder customers. One had to place a new deposit in order to participate in the "Be Free!" campaign. During the fuel crisis caused by the war they raffled off five electric scooters bi-weekly, while during frequent power failures customers could win portable solar generators. OTP Hungaro-Projekt helped its customers in drafting applications and in winning grants in 2022 as well. A total of 115 applications with environmental benefits, prepared by the company, were awarded grants under the EU Rural Development Programme. 111 projects were submitted for grants to support precision farming developments for the digital transition of agriculture, three for the development of agricultural water management and one in response to the Innovfund invitation for applications. The overall total budget of the projects was HUF 30.6 billion of which the amount of grants awarded was HUF 14.8 billion. The company has, since 2022, been promoting green activities by way of its consultancy activities as well. Its environmental consultancy covers the estimation of the environmental risks of real estates, inspections and examinations required for authorisations, licences and permits as well as green strategy development, etc. Moreover, Hungaro-Projekt undertakes to work out frameworks in relation to green bond issues, along with complex consultancy in relation to sustainable/green corporate investments. Gamechanger RS Generator (Gamechanger) is the Serbian subsidiary bank's programme that has been helping local startups for a number of years now. The Generator Zero competition launched in the context of the programme in 2021 sought for and rewarded specifically innovative carbon footprint reducing solutions in INTEGRATED ANNUAL REPORT 2022 97 OTP BANK BUSINESS REPORT 2022 (CONSOLIDATED) 2022. In addition to the HUF 6 million financial reward the winner received mentoring assistance as well. Of the 72 applications, 10 projects made it to the finals; preference was given to projects that could be implemented within 6 months of winning the prize. Numerous external partners recognised the importance of the initiative (e.g. Mastercard, Schneider Electric, OTP LAB) and, joining the programme, they offered prizes for the best finalists. The winner of the programme was the B-FRESH Technologies team; their product helps keeping fruits and vegetables fresh, with the help of an emulsion that can be sprayed onto any packaging material to form a water-resistant protective layer. The Generator programme was the most vigorously communicated responsibility project in the Serbian bank sector. It won multiple prizes and awards in Serbia. 2.3. Investments ST2, ST7, ST8: 3-3, TCFD II.a,b, III.a,b,c, IV.a Sustainability endeavours regarding investment funds and investment services are determined by strong statutory requirements. The Banking Group's fund managers offer a number of ESG funds to their customers. FN-IB-410a.3. In 2022 – in accordance with the SFDR19 – each of the OTP Group members concerned adopted its investment sustainability risk management policy and supplemented the information provided for its customers with information on that policy. The members of the Banking Group published on their websites the statements on the integration of sustainability risks and on the principal adverse impact of investment decisions on sustainability factors (PAI). Environmental impacts must be measured and monitored from 2023 under the SFDR. From the end of 2022 we will provide publicly available information on the adverse impacts of the portfolios managed in the framework of our portfolio management services on sustainability factors. In the case of this service we introduced so-called cumulative risk limits in relation to ESG. Portfolio managers put together their portfolios making sure that the aggregated weight of the lowest scoring elements from the perspective of sustainability – i.e. those categorised as CCC, B and BB on the 7-grade MSCI scale – is as low as possible. The selection of the funds recommended in the context of investment advice is based on quantitative and qualitative criteria, including sustainability risk considerations inter alia. Excluded from investment advice are investment funds with high or medium sustainability risks (CCC and B on the MSCI scale). The fitness test of the MIFID220 framework – the purpose of which is to protect investors' interests and to ensure high standard service provision for customers – is aimed at assessing the customer's financial knowledge, investment objectives, risk bearing capacity as well as financial situation and income, to help the Bank offer the customer products aligned to these factors. Since 2022 the questionnaire explores sustainability preferences and objectives more thoroughly than before. In the context of our investment advice and portfolio management services we primarily offer products and services accordingly. A customer is provided with feedback on its conformity to the sustainability preferences in the suitability report. OTP Bank plans to create portfolios promoting sustainability targets. GRI 203-2 The investments of investment funds are selected as described in the funds' management policies. Some of OTP Alapkezelő's funds (OTP Közép-Európai Részvény Alap/OTP Central European Equity Fund, OTP Quality Alap/OTP Quality Fund, BUX ETF Alap/BUX ETF Fund) focus their investments specifically on the Central and Eastern European region. Such investments accounted for 2.79 percent of the assets managed at the end of 2022. Responsible investments ST8: 3-3, GRI 201-2 The OTP Group's three funds are products promoting environmental and/or social characteristics, i.e. products corresponding to Article 8 under the SFDR. The purpose of OTP Alapkezelő's @Klímaváltozás Részvény Alap (Climate Change Equity Fund) is to select equities that may be potential winners or losers of the global climate adaptation process. At least 50 percent of the final portfolio must be made up of equities of companies that have a good – "sustainable" – ESG 19 REGULATION (EU) 2019/2088 of the European Parliament and of the Council of 27 November 2019 on sustainability-related disclosures in the financial services sector. 20 DIRECTIVE 2014/65/EU of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments and amending Directive 2002/92/EC and Directive 2011/61/EU, and the relevant regulations INTEGRATED ANNUAL REPORT 2022 98 OTP BANK BUSINESS REPORT 2022 (CONSOLIDATED) rating besides contributing, in our opinion, to the conservation of planet Earth. OTP Alapkezelő is planning to ensure the fund's conformity to Article 9 of the SFDR. The fund manager has been promoting OTP Klímaváltozás Részvény Alap for some years through PR appearances as well, drawing attention at the same time to responsible investments. For the sixth time in 2022, the Fund won Privátbankár.hu's Klasszis award: The Best Global Equity Fund 2022 award. Investment Director Gábor Czachesz – the manager of the fund – won the Klasszis 2022 – Portfolio Manager of the Year award. As to the fund called @Omega Alapok Alapja (Omega Fund of Funds) the aim is to make sure funds that conform to Article 8 or Article 9 of the SFDR make up at least 70 percent of the fund. Again, at least 50 percent of the final portfolio must be made up of equities of companies that have a good – "sustainable" – ESG rating. These two ESG funds do not invest in tobacco production and sales, defence and arms and the gambling industry21. The limits covered by the risk management regulation are checked on a weekly basis. At end-2022 the assets of OTP Klímaváltozás Részvény Alap and OTP Omega Alapok Alapja amounted to HUF 35.1 billion and HUF 33.4 billion, respectively. The two ESG funds accounted for 3.03% of the total asset managed by OTP Alapkezelő. RO OTP Asset Management Romania – the Group's asset management company in Romania – was the first such company in Romania to launch investment fund matching Article 8 of the SFDR. The investments of @OTP Innovation Fund are aimed at international companies that spend a significant proportion of their revenues on research and development (R&D). The investments are effected in the technological, biotechnological, e-commerce and automotive sectors, to name but a few. The aim is to keep the fund's aggregate sustainability risk profile low and make sure that at least 85 percent of the portfolio is made up of medium or low sustainability risk elements, which the fund manager also measures in terms of the MSCI ratings. The fund applies an exclusion policy as well. The fund's total asset amounted to HUF 304 million and had nearly 300 investors at the end of 2022. As well as the Banking Group's own ESG funds, other fund managers' ESG funds are also available for customers. At the end of 2022 a total of 2.52% of the retail securities account portfolio was made up of the portfolios of investment funds meetings the requirements of Articles 8 and 9 of the SFDR. 2.4. Management of ESG risks GRI 201-2, TCFD II.a,b, III.a,b,c, IV.a The integration in the risk management processes of environmental, social and corporate governance risks continued in 2022 – the Banking Group continued to make significant progress in this field. Lending risks FN-CB-410a.2, FN-MF-450a.3. Every single OTP Group subsidiary worked out, and introduced, its ESG credit risk management framework in the business division in early 2022. The purpose of ESG risk management during the lending process is to identify and mitigate the risks arising from environmental, social and governance factors. In the wake of the subsidiaries' introduction of their respective frameworks OTP is now applying the ESG risk heat map in a uniform way across the Group, together with the ESG exclusion list and the ESG risk ratings system. Work on the development and improvement of the risk management methodology is planned to be continued. GRI 2-13, TCFD I.a Work on the development of the internal ESG credit risk exposure reporting got under way in 2022; due to data cleansing tasks the system will be finalised in 2023. Reports will be prepared on a quarterly basis. The Supervisory Board will also receive reports on the loan portfolio. the Banking Group worked during the year on the ESG lending appetite framework as well. The 2022 Risk Appetite Statement specifies limits regarding the ESG risks which are backtested on a quarterly basis. In addition to using an exclusion list we introduced a new indicator to help restrict the proportion of new high ESG risk transactions. The indicator has been applied first by OTP Bank, since the beginning of 2023. Our subsidiary banks operating in three EU Member States (Bulgaria, Croatia and Slovenia) are introducing similar limits in their Lending Policies. 21 Based on Bloomberg Industry Classification data INTEGRATED ANNUAL REPORT 2022 99 OTP BANK BUSINESS REPORT 2022 (CONSOLIDATED) In the case of commercial real estates serving as collateral the sustainability considerations will form a separate element of assessment in real estate appraisal. The application of the ESG assessment methodology developed by OTP Jelzálogbank was started in the Hungarian operation at the beginning of 2023. Decision on the group-wide application of the methodology will be made in view of practical experience. The energy efficiency characteristics of collateral residential real estates – established during the value appraisal procedure – are reflected by the market value and in the credit collateral value. The collateral portfolio has been reviewed in the retail segment from the aspect of energy efficiency on the basis of the energy efficiency ratings of the real estates comprised in the portfolio. In view of the findings a total of four ESG real estate risk categories were formed in 2022 in the Hungarian practice for further analysis of the collateral portfolio. One of the key objectives is to maximise the proportion of real estate collaterals on which the energy ratings are available, in the bank's records. The ESG criteria will be integrated in retail lending in the case of retail loans secured by real estate collaterals because these are the products in which the ESG criteria are the most significant. HR The Croatian subsidiary bank carried out the geographical mapping of mortgage collaterals, and on the basis of that, the materiality assessment of climate and environmental risks. ST14: 3-3 The ESG exclusion list of the ESG credit risk management framework of the business segment includes activities and behaviours that, due to their disputed nature or effects, cannot be reconciled with the core principles of OTP Group, the protection of human rights and the promotion of sustainable development. Among others, the list includes the following exclusions: • • • customers whose financing is forbidden in international accords, EU acts or national laws; customers and transactions who/which violate the legislation of the country concerned or international laws (e.g. illegal arms trade, prohibited gambling, illegal trade of drugs and medicines); financing in relation to controversial weapons (nuclear, biological or chemical weapons, anti-personnel mines); • manufacturing and trading products that contain PCBs; • trading in specimens of wild animals under the CITES Treaty or in the products made from them. The full ESG exclusion list is laid down in the Bank’s internal regulations. Customers are required, as a minimum, to comply with the relevant and applicable environmental and social laws and regulations and have the relevant permits, licences and authorisations. During the credit approval process the customer's and the transaction's ESG risk rating is seen, and taken into account, by the decision maker, in decision making. GRI 201-2 The first climate change stress testing took place for the first time in 2022, as part of the internal capital adequacy assessment process. The stress test (CChSTs) was focused on identifying climate change- induced financial losses; the exposure of the OTP Group's portfolio to physical and transition risks in the long run (up to 2050) was examined. The results show that the annual losses would only increase modestly (by about 0.15 percentage point as a proportion of the exposure) up to 2050 even under the most disadvantageous so-called Hot House scenario in comparison with the climate-neutral trajectory. There is, of course, a considerable uncertainty factor in these assessments. The OTP Group's exposure to physical risks is in line with the average exposure of banks in the euro area. This type of risk is higher in two countries: Russia and Romania. The OTP Group's exposure to transition risks is somewhat higher than that of average banks in the euro area – because of the higher carbon intensity of the economies in the Central and Eastern European region. In the area of the Banking Group's operations the economies of Bulgaria and the non -EU member states are significantly more carbon intensive.22 Short term climate stress testing is planned to be carried out in 2023 regarding transition risks, covering lending, market and operational risks as well. Moreover, a pilot project has been launched in Hungary to model the physical risks of climate change. GRI 305-3, 305-5, TCFD II.c, IV.b The estimate of Scope 3 (indirect) greenhouse gas emissions has been worked out as one of the first steps towards mitigating climate risks. The calculation – in accordance with the methodology based on the PCAF (Partnership for Carbon Accounting Financials) Greenhouse Gas Protocol – was carried out with the help of the consultancy firm Klima.Metrix, for the end-2021 Group portfolio. Four segments were formed as prescribed by the PCAF protocol: corporate loans, retail mortgage loans, commercial real estates and motor vehicle loans. In lieu of adequate guidance, unsecured real estate loans were not included. On the whole, the calculation covers 81.3% of the total loan portfolio. The PCAF specifies five categories in terms of accuracy, with Category 1 being the most accurate. Due to data accessibility problems most results are Category 4 or 5; the calculation is based primarily on average 22 At purchasing power parity, as a proportion of GDP. INTEGRATED ANNUAL REPORT 2022 100 OTP BANK BUSINESS REPORT 2022 (CONSOLIDATED) emissions at a macroeconomic level and where the data were not accurate enough or were not available at all, we resorted to substitution. The calculation is the current best available approximate estimate. The parent bank communicated the results to the subsidiary banks. We aim to improve the calculation's accuracy, which is expected to be enabled by increases in the quantity and range, and an improvements in the quality, of publicly reported data. The Banking Group will work out its decarbonisation strategy by 2025 and plans to disclose the Scope 3 financed emissions for the first time regarding year 2024. The adequacy of ESG risk management is assessed primarily from the perspective of conformity to the MNB's Green Recommendations23 and the requirements of the European Central Bank. The Bank monitors progress in terms of the requirements laid down in the Green Recommendation and keeps both the Management Committee and the ESG Committee regularly informed. The development and applicat ion of the new processes take, in some cases, more time and resources than planned in advance, partly because these processes are altogether new in the whole of the market and because the subsidiary banks are being faced with questions and tasks that are different from the ones the parent bank has to deal with. Operational risks The possible impacts of the climate change risk were integrated into both the business impact analysis and the business continuity plans. A Group ESG risk tolerance value was worked in early 2022, for quarterly monitoring. ESG risks were integrated in operational risk management as early as in 2021. During the annual process - based risk and control self-assessments respondents asses the next year’s losses expected from the aspect of ESG relevance as well. Mitigating actions are expected to be worked out by the divisions concerned for risks of over HUF 200 million losses expected. The list of risks was refined and the actually relevant ESG risks were identified in 2022. Loss data are also monitored from the aspect of ESG relevance. the Banking Group uses scenario analysis for the assessment of events of low probability but high potential impact. The impacts of climate change have been examined under a separate scenario since 2021 (together with all risks of environmental relevance). The same methodology is applied in the scenario analyses for the parent bank, foreign subsidiaries and Merkantil Bank. Of the group members OTP Bank Ukraine identified the greatest loss expected in relation to climate change in 2022 (the financial impact of the materialisation of the risk), in an amount of HUF 1.9 billion, three times more than in the previous year. In addition, the Bulgarian, the Romanian and the Croatian subsidiary bank calculated significantly larger losses expected than in 2021. Out of the 17 scenarios analysed, the value of loss expected under the climate change scenario was among the smaller expected losses at all Group Members. Reputational risks relating to ESG considerations were also assessed and evaluated in 2022 in the context of the ECB (European Central Bank) climate stress test. As many as six reputation scenarios were assessed, as required by the ECB. "Media campaigns relating to environmental issues, contributing to the deterioration of the institution's reputation" was the scenario for which the largest amount loss expected – HUF 705 million – was established. Continued development of ESG risk management was identified as a separate programme in OTP Bank's new medium term risk strategy. 2.5. Products with social benefits ST1: 3-3 Several members of the OTP Group have traditionally been paying particular attention to catering for the financial needs of the young and the elderly and to making available preferential facilities for housing purposes. The member companies concerned continued to increase the number and variety of such products in 2022 as well. The sustainable financial framework identifies the eligible social category exclusively in the segment of loans and credits available for financing and/or refinancing SMEs. Products beyond this target group are also described below. Large numbers of refugees fled from war-torn Ukraine to most countries in which the Banking Group members are operating; we provided them with assistance in the way of financial services as well. Every 23 Recommendation No. 10/2022. (VIII.2.) of the National Bank of Hungary (MNB) on climate change and environmental risks and the integration of environmental sustainability aspects in the activities of credit institutions INTEGRATED ANNUAL REPORT 2022 101 OTP BANK BUSINESS REPORT 2022 (CONSOLIDATED) subsidiary bank made it possible for Ukrainian refugees to exchange money, open accounts, rent safe deposit boxes and use other services. Moreover, many of our subsidiaries offered them preferential facilities. HR SI MD ME The Croatian subsidiary bank created a specific account package – comprising all basic services free of monthly charge, including cross-border transfers free of charge – for Ukrainian refugees. The Moldavian subsidiary also provide multiple banking services free of charge for Ukrainian citizens, along with a simplified money exchange service. The Slovenian subsidiary also opens basic account packages free of charge, for use free of charge for three months, for Ukrainian refugees. Likewise, the Montenegrin subsidiary, charges no fee for account opening for Ukrainian refugees, and for their the use of such accounts, for six months. SI The Slovenian subsidiary did not charge transfer fees to humanitarian organisations in 2022 either. Accordingly, their donors and sponsors can transfer them amounts, free of the transfer fee. The OTP Group offers special preferential products for young people in 9 countries24. A total of 11 percent of the whole Group's customers (1.7 million persons) are aged below 26. The selection of products varies from country to country. It includes account packages, savings for children, overdraft facilities, bank cards and student loans. Some subsidiaries (e.g. CKB) provide preferential terms for accounts held for the receipt of scholarships. HR OTP Bank Croatia integrated a preferential condition in its service provided for young people in 2022: domestic transfers free of charge through mobilbank. RO The Romanian subsidiary also provided additional preferential terms and conditions; this time they provided more favourable conditions for debit card use. The number of pensioner customers typically surpasses that of younger customers at the banks of OTP Group. Tailored to their needs, special products are available for this customer segment in six countries: Bulgaria, Serbia, Croatia, Montenegro, Albania and Ukraine. No new product/service was introduced in this segment in 2022. Minimum packages are available for customers who require a narrower range of services. Access to basic financial services is provided by such accounts. The Croatian bank offers a preferential package for socially disadvantaged customers. The demand for such basic packages has been rather low for years now; not more than a few hundred customers uses them at any one of our banks. In view of the prevailing macroeconomic circumstances OTP Bank made account management free of charge for customers who lost their jobs in a broader range of account packages in 2022. The Bank waives the monthly fee in the case of customers receiving job seeking allowance, for a period of 4 months, to help them manage their difficult situation in life. DSK Bank provides customers with reduced mobility accounts with debit cards under preferential terms and conditions, which were used by more than 42 thousand customers at the end of the year. The Moldavian subsidiary offers eligible customers meeting certain criteria with special facilities for pensioners. Customers with reduced mobility can apply at OTP Bank for support for making their homes barrier -free, which was used by some four hundred customers in 2022. The subsidised loan offered in Hungary to families planning to have / expecting children was available until the end of 2022. Demand for the product declined substantially during the year but it sti ll represents a dominant proportion of the total volume of consumer loans. It is an important feature of the maximum HUF 10 million interest-free loan that the outstanding debt on the loan will convert into a non-repayable state subsidy if minimum three children are borne during the term. OTP Bank had a 42% share of disbursements and the existing portfolio as well, in 2022. Access to real estates, modernisation GRI 203-2 Members of the Banking Group play an important role in the implementation of housing goals primarily through mortgage loans25. We are providing our customers with predictable loans geared to their debt servicing capabilities and promoting the use of energy efficient solutions. At the end of 2022, the number of housing loans outstanding at OTP Group was around 400 thousand, new loans stood at 51 thousand. Besides Hungary and Bulgaria, Serbia, Slovenia, Romania and Croatia contributed the most to house purchases and renovations. 24 Hungary, Bulgaria, Montenegro, Croatia, Slovenia, Romania, Albania, Ukraine, Moldova. The age limit is not 26 for all schemes. 25 OTP Bank Russia does not offer mortgage loans and nor does this type of service account for much of OTP Bank Ukraine's operations either. INTEGRATED ANNUAL REPORT 2022 102 OTP BANK BUSINESS REPORT 2022 (CONSOLIDATED) The decrease in the number of new housing loans, that started in Hungary in the second half of 2021, continued in 2022. Nearly 30 contracts were concluded during the year. In Hungary 26, the number of housing loans outstanding stood at 221 thousand at the end of the year. The Housing Subsidies for Families (CSOK) programme – under which non-refundable subsidy can be applied for – has been available and popular for years now. The Home Renovation Loan was also introduced in 2021, making it possible for people raising children to borrow preferential rate, interest-subsidised loans. The Bank placed 4,600 loans in 2022, in a total amount of HUF 23.7 billion. The Green Home Programme (GHP) is also aimed at helping customers purchase residential real estates; for details, see subsection @2.2. The proportion of subsidised loans relative to the total of disbursed real estate loans is substantial: in 2022 they accounted for about two thirds of all loans, of which the share of the GHP was 46%. OTP Bank had a 54% market share in subsidised loans. Most housing loans (47%) are borrowed in Hungary for purchasing used homes; new home purchases however, increased by 8 percentage points year-on-year to 19% in 2022. Renovation and modernisation accounted for 19 percent, construction and extension made up 16 percent. As well as mortgage loans, OTP Bank offers Personal Loan for Renovation for housing purposes. This product was used by customers in 2022 primarily for prefinancing the home renovation subsidies. Personal loans made up 4% of the total amount disbursed during the year. The preferential home leasing facility continued to be available in 2022 at OTP Ingatlanlízing Zrt. for customers employed by the Hungarian Defence Forces. More than 200 customers used this product during the year. HR The Croatian subsidiary bank also participated in programmes in cooperation with the state, providing preferential loan conditions – lower interest rates and fixed interest rates for longer periods of time – for customers purchasing their first homes. This product was used by 1,113 customers in 2022 in a total amount of HUF 45.1 billion, making up 24 percent of all housing loan transactions. A decision was adopted back in November 2021, on the bank's participation, joining a facility initiated by the Government, in the rebuilding of condominiums damaged by the earthquakes of 2020. Since however, the envisaged legislative background of the state aid had not been worked out, demand for the facility remained very low (a total of 4 applications were submitted). To enable reconstruction nonetheless, the Bank is offering its own loan programmes for condominiums. RO The Romanian subsidiary continued to provide mortgage loans with state guarantee to help young people purchase their first homes, in 2022 as well. Loans were placed under a total of 140 transactions in an amount of HUF 2.4 billion in 2022 and the facility was much in demand even while demand for loans declined in general as a consequence of rising interest rates. MD The Moldavian bank also continued participating in the First Home Programme, under terms and conditions the same as in the preceding year. The bank disbursed 14 new loans in an amount of HUF 134 million in 2022. ME In Montenegro a state-subsidised programme called 1000+ apartments provides preferential-rate loans for disadvantaged and endangered social groups, in the way of support for housing purposes. The subsidiary bank disbursed a total of 18 loans to customers during the year in a total amount of HUF 370 million, significantly less than in 2021. BG The Bulgarian subsidiary bank launched a new electronic platform in cooperation with the company called OCENIME.BG: www.dskhome.bg-ot. The website offers complex services for those looking for homes, ranging from finding real estates to the complete loan application process. As a new function, signing loan agreements was introduced on the platform by the end of 2022. OTP Bank plays an important role in serving the financial needs of condominiums. At the end of 2022 the number of condominium customers was more than 39 thousand, securing a 67% market share for the Bank. No new products or services were introduced in 2022. The Group had a total of 47 thousand condominium customers. OTP Condominium grant scheme OTP Bank has been traditionally inviting applications for grants to support the modernisation of condominiums, in a total of HUF 15 million. In 2022 the Bank laid particular emphasis on facilitating efforts aimed at making retail communities more sustainable and their environment greener. A considerable number – 650 – applications were submitted under the scheme this year again. Grants were awarded by a 26 OTP Core and OTP Ingatlanlízing INTEGRATED ANNUAL REPORT 2022 103 OTP BANK BUSINESS REPORT 2022 (CONSOLIDATED) professional panel in view, for example, the interests of the communities concerned and the improvements in the quality of their environment. Grants were awarded to a 9 condominiums in Budapest and 11 condominiums in rural Hungary. In Budapest, the awardees in the "More Sustainable Homes" category were provided with support for the modernisation of condominiums' energy systems, and one project for making the condominium barrier -free. The amount so won can be spent in Tiszaújváros on draft booster turbines utilising wind energy, while the residents of a condominium in the town of Szeged will use this amount on the replacement the stairwell doors and windows, modernising the building's thermal insulation. Of the "Greener Residential Environment" awardees two condominiums in Budapest and one in Tata received grants for creating and improving green spaces. In one condominium in the town of Nagykanizsa playground facilities will be installed in an already existing yard, while in Budapest the worn and dangerous rubber mats of the playground of a condominium will be replaced with new ones . The grant will be used by a condominium in the town of Hajdúböszörmény for the installation of a used oil container facility while residents of a condominium in the town of Vác put in place a selective waste collection system. The Banking Group participated in the development of a number of services that go beyond banking services per se and generate social utility as well. RO OTP Bank Romania contributed to developments aimed at rendering the use of the local public transport services more convenient in three large towns in Romania by providing self-service electronic payment terminals. Customers can purchase tickets and passes from the contactless ticketing machines. The subsidiary bank and a number of service providers together introduced contactless payment on delivery for products purchased from them on-line. The solution's distinguishing feature is that this was the first time a corporate device was turned into a POS terminal. The Mastercard certification proves that this payment method meets the highest data security standards. OTP Startup Booster Program Under the OTP Startup Booster Programme we seek for cooperating partners based on needs for innovation as they emerge year after year. 265 startups from 55 countries registered for the 2022 programme. Bank managers, professional mentors and external experts lend their support to participating companies in perfecting their products in a 12-week intensive programme in 40 hours of workshop activity and 100 hours of individual mentoring. In its autumn pilot period the programme enabled 11 expansion-stage startups to implement a joint test project with the help of various specific divisions (5 from the parent bank and 6 from subsidiary banks). The programme was closed by an on-line Demo Day providing the teams with substantial international visibility. The startups with which we will conclude long term cooperation agreements will be selected in the next period. With growing emphasis having been laid on sustainable solutions and the fight against climate change we introduced in 2022 the Beyond banking and sustainability category in which startups working on solutions that are outside the Bank's core activities, that are related to ESG goals, agricultural solutions, or solutions relating to real estate ecosystems and other sustainability and/or green subjects could register. Four pilots were selected from the registered ones but no long term decision has been made yet on any one of them. Two selected startups are providing agricultural services: Agremo works out yield analyses and forecasts for agricultural areas on the basis of drone and satellite images, Yieldsapp offers data -based recommendations relating to crop production on the basis of satellite images. The Cogo carbon footprint calculator is able to calculate the carbon dioxide emissions of retail customers and encourage reductions at the same time. MClimate calculates increments of buildings' energy efficiency and improvements in the comfort perception of people working in them, with the help of IoT sensors. (see Section @6.) Micro, small and medium-sized business customers ST1: 3-3 Year 2022 was a year full of challenges for many a small and medium-sized enterprise. Although varying in severity problems were caused in every single country of our region by disruptions in the supply chains in the wake of the coronavirus pandemic, the war and the accelerating inflation. The OTP Group continued to play an active role in providing small and medium-sized enterprises with access to funding even in such circumstances. The loan portfolios of micro and small enterprises increased at most of the Group's banks; we participated in numerous state and international institutional initiatives with the aim of providing preferential financing arrangements. INTEGRATED ANNUAL REPORT 2022 104 OTP BANK BUSINESS REPORT 2022 (CONSOLIDATED) The micro- and small corporate loan portfolio of the Hungarian OTP Group increased by 16 percentage points during the year. The segment was dominated by the products of the state interest-subsidised Széchenyi Programme.27 Our goal was to be the first institution to introduce the product in the market and carve out the largest market share. We accomplished both goals: the Bank's market share was 33% with the Széchenyi Újraindítási GO! product which was available in the first half of the year, and 37% with the Széchenyi Újraindítási MAX product which was launched in the second half of the year. GRI 203-2 The credit products were available at the MFB Points for businesses as well (see also@2.2). The MFB Points were set up earlier to help businesses facing difficulties access funding; in 2022 – as a consequence of the pandemic and the impacts of the war between Russia and Ukraine – the range of businesses concerned increased considerably. OTP Bank's role and market share also increased during the year. In view of the fact that the previous EU budget cycle had ended, it became possible in 2022 to start selling a new loan programme through the MFB Points: loan purpose "B" of the loan programme whose purpose is "technical modernisation of micro, small and medium-sized enterprises" is to help manage economic difficulties caused by the war between Russia and Ukraine. The working capital credit facility was available for operating costs, wages and contributions as well as standing charges. In terms of credit applications OTP Bank's market share was higher than 60 percent. As many as 1257 contracts were concluded for the disbursement of a total of HUF 28.5 billion by the end of the year. In the wake of the introduction of changes to the flat-rate tax for small taxpayers (KATA) OTP Bank offered a preferential entrepreneurial account management package for private entrepreneurs obliged to have payment accounts with financial institutions under the amended law. During the 4-month campaign our customers opened more than 5,000 new accounts. The MSE loan portfolios of the Croatian and the Romanian subsidiary banks increased by about 20 percent; that of the Bulgarian subsidiary increased by an even more substantial 26 percent. The Ukrainian and the Serbian subsidiary's MSE loan portfolios increased by about 10% and 5%, respectively, while the corresponding portfolios of the Slovenian and the Albanian subsidiaries remained unchanged. The MSE portfolio shrank in Montenegro partly as a consequence of businesses' financial difficulties and the termination of the EIF products. The MSE portfolio decreased in Moldova as well. Lending in Russia was suspended in February 2022, therefore the portfolio dropped dramatically there. Our subsidiaries cooperate with numerous state and international institutions in support of the SME sector. RO Our Romanian subsidiary joined a programme supporting SMEs and sole proprietorships as a partner bank. The programme is aimed at promoting the establishment and development of small and medium-sized enterprises with the help of state aids. The Bank opened dedicated accounts for its customers through which the aid amounts are channelled to the recipients. Applications for credit facilities enabling the pre -financing of the aids may also be submitted to the Bank. OTP Bank Romania participated in the government's IMM Investment Programme, as one of the first financial institutions to make available the products concerned, in 2022 as well. Businesses can borrow interest-free loans under the programme, with up to 90 percent government guarantee. The loan was available for agricultural businesses as well. As many as 459 loans in a total of HUF 33.8 billion were provided in 2022. In response to the great demand experienced in the previous year the subsidiary announced its Black Friday campaign twice in 2022, offering account opening with account management for free and other preferential terms and conditions on not only one but two days. HR The Croatian subsidiary continued to cooperate with the Croatian Bank for Reconstruction and Development (CBRD), to help exporters. In 2022 they offered Covid-19 insurance to working capital loans and provided loans of HUF 1.7 billion under two contracts during the year. In response to the impacts of the Covid-19 pandemic the Bank entered into a cooperation arrangement with the European Investment Fund (EIF) as well, in 2022. The EIF provides guarantee under the programme therefore customers can borrow loans at lower interest rates and with reduced collateral coverage. In 2022 they provided 15 loans in a total amount of HUF 3.4 billion. RS The Serbian subsidiary participated in the grant programme announced by the Ministry of Finance to help small businesses purchase assets. As many as 38 loans were disbursed by the end of 2022 in a total amount of HUF 912 million. ME The EU Micro Loan for Working Capital of CKB contributed to the funding of micro enterprises in 2022 as well. The Bank provided loans in cooperation with the European Programme for Employment and Social 27 These products were available for large enterprises as well. INTEGRATED ANNUAL REPORT 2022 105 OTP BANK BUSINESS REPORT 2022 (CONSOLIDATED) Innovation (EaSI) of the European Investment Fund under an EU guarantee agreement, until the termination of the product in the first quarter of 2022. Loans of HUF 1.8 billion were active under 1,040 contracts in 2022. The loan was available for agricultural businesses as well. MD The IFAD's (International Fund for Agricultural Development) Young Entrepreneurs Loan was available at our Moldavian subsidiary. Owing to the prevailing macroeconomic circumstances only 2 new customers availed themselves of the preferential facility, in a total of HUF 25 million. the grants for greening, agricultural environmental management and young OTP Bank uses the technique of factoring for pre-financing EU agricultural subsidies; in addition to area payments farmers, compensation payments for Natura 2000 grasslands are delivered in this way. The scheme was available for the pre-financing of 35 grant titles in 2022. With this product, our customers can access funding within just a few days, at conditions that they can meet more easily. The closing factoring portfolio was HUF 17.0 at the end of 2022. The Hungarian State Treasury has, since October 2022, been paying advances on aids; consequently, demand for the Bank's facility has decreased; in the first three quarters of the year however, a year-on-year increase of more than 20 percent was recorded. GRI 203-2 In Hungary, subsidies for a land area of almost 1.3 million hectares are credited to the accounts held with OTP Bank; our employees assist in their utilisation. BG HR RO SI Prefinancing of area payments 28 (Double SAPS) is one of the key agricultural products of every OTP bank operating in EU Member States with the exception of Slovenia. One of the significant advantages of this service is the fact that a single application and credit approval process is no w sufficient for the two-year pre-financing of EU direct subsidies, which has halved administrative costs. Even the application for three years (Triple SAPS) was introduced in Romania in October 2022. Our plans include creating the conditions for pre-financing direct grants in Slovenia as well, but owing to the ongoing bank acquisition process the product was not developed in 2022. A number of OTP Group members provide special product packages to agricultural small businesses and farmers in cooperation with state agencies or EU organisations. RO OTP Bank Romania launched a new product called "Ceiling for the financing of crop producers", offering up to RON 5 million (HUF 395 million) credit limits for the financing of the production of spring and winter crops as well as maize. The advantage lying in the product is that it is available without the customers having to provide supplementary collateral. A total of HUF 195 million was disbursed in 2022. In 2022 the Bank became a partner bank the delivery of non-repayable state grants provided for agricultural and food industry companies, therefore it opened dedicated accounts and transmitted the grants to the programme's beneficiaries. MD Our Moldavian subsidiary continued to provide the EIB Fruit Garden scheme for horticultural and viticultural undertakings under unchanged conditions in 2022 as well. The Bank financed as many as 18 projects during the year in an amount of HUF 974 million; the number of active customers participating in the scheme was 102, and total loans amounted to HUF 5.7 billion at the end of the year. OTP Hungaro-Projekt and OTP Consulting Romania The member companies contributed to the achievement of social goals by preparing applications and providing project management services. In 2022 the OTP Hungaro-Projekt drafted and submitted 9 applications under EU support schemes, in the categories of support for micro and small enterprises operating in disadvantaged regions, development of companies' research, development and innovation activities as well as technology modernisation of micro -, small and medium-sized enterprises. 8 of the 9 applications were awarded grants. The total cost of the winning projects amounted to HUF 3.7 billion of which the grants covered HUF 2.4 billion. RO The Romanian subsidiary participated in the implementation of three EU-funded projects in 2022 which were aimed at enhancing environmental awareness and promoting the development of vulnerable and disadvantaged local communities through human capital development. The purpose of the two-year-long AID4NEETs project was to assist young unemployed persons in the North- Eastern and central part of the region. The programme pays special attention to equal opportunity; there are minimum criteria for the Roma communities, those living in rural regions and disadvantaged people. Two other projects were aimed at the encouragement of students to start a business in the least developed seven 28 Companies may use these products without any limitation in size. INTEGRATED ANNUAL REPORT 2022 106 OTP BANK BUSINESS REPORT 2022 (CONSOLIDATED) regions of Romania. The aim of the projects is to create as many as 130 new jobs. The programmes included concrete actions regarding the introduction of green practices as well. PortfoLion The venture capital fund manager invests in early stage, growth stage and expansion stage startups. The company does not invest in high ESG risk undertaking; they are automatically excluded from cooperation. The sustainability risk management policy is available here: @website. New investments whose activity contributes to social or environmental objectives were added to the company's portfolio in 2022 as well. Mindgram provides services aimed at developing and improving mental health and professional and managerial skills in the form of complex solutions. The concept's first pillar provides solutions for prevention and personal development, the second one provides early intervention and work-private life services, while the third pillar offers targeted on-line psychotherapy. Tiney offers solutions for daycare combined with high quality education for children up to the age of 5, based on a method not used in Great Britain before. Owner of 18 retail parks, GRADUW Invest29 enables energy efficiency improving ESG projects in its real estates. 29 At the time this report is drafted it is called Shopper Park Plus Zrt. INTEGRATED ANNUAL REPORT 2022 107 OTP BANK BUSINESS REPORT 2022 (CONSOLIDATED) 2.6. Portfolio components by sector GRI 2-6, FS6, FN-CB-410a.1 Micro and small enterprises Assets by sector, on-balance sheet exposure to own customers without leasing and consolidation, 31.12.202230 Agriculture, forestry, fishing Mining, quarrying Manufacturing Electricity, gas, steam and air conditioning supply Water supply; sewerage, waste management and remediation activities Construction Wholesale and retail trade; repair of motor vehicles and motorcycles Transportation and storage Accommodation and food service activities Information, communication Financial and insurance activities Real estate activities Professional, scientific and technical activities Administrative and support service activities Public administration and defence; compulsory social security Education Human health and social work activities Arts, entertainment and recreation Other services Activities of undifferentiated goods for own use Not classified Total (HUF billions) households employers; as Hungary Bulgaria Croatia Serbia Russia Ukraine Slovenia Romania Montenegro Albania (with Alpha Bank) Moldova 6% 0% 9% 0% 0% 18% 29% 6% 4% 3% 0% 6% 5% 4% 0% 1% 1% 1% 5% 0% 0% 569.9 22% 0% 13% 0% 0% 7% 30% 11% 3% 1% 0% 2% 3% 2% 0% 0% 3% 0% 1% 0% 0% 93.9 18% 0% 8% 0% 0% 7% 12% 5% 7% 1% 0% 1% 3% 34% 0% 1% 2% 1% 1% 0% 0% 57.8 2% 0% 25% 0% 1% 8% 35% 7% 3% 2% 0% 0% 5% 2% 0% 1% 1% 0% 1% 0% 7% 57.6 1% 0% 9% 0% 0% 24% 42% 5% 4% 1% 0% 5% 4% 3% 0% 0% 0% 1% 1% 0% 0% 0.8 0% 0% 2% 0% 0% 0% 4% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 60% 32% 1.5 4% 0% 20% 0% 0% 16% 22% 11% 6% 2% 0% 1% 10% 3% 1% 0% 2% 1% 1% 0% 0% 20.5 7% 0% 11% 0% 1% 14% 32% 10% 4% 2% 3% 2% 7% 3% 0% 1% 3% 0% 1% 0% 1% 25.0 4% 0% 11% 0% 0% 8% 32% 14% 13% 3% 0% 2% 5% 3% 0% 0% 1% 0% 3% 0% 1% 4.7 3% 0% 13% 0% 0% 3% 24% 2% 27% 1% 0% 0% 1% 3% 0% 1% 2% 0% 4% 0% 16% 29.7 43% 0% 10% 1% 0% 4% 25% 5% 2% 0% 1% 2% 2% 0% 0% 0% 2% 0% 1% 1% 1% 12.9 30 The table contains the data of only those sectors whose share is above 0.5 percent. Because of that and because of rounding, not all columns add up to 100%. Industrial classification is according to UN (ISIC) classification. Company sizing complied with the relevant legal categorisation. INTEGRATED ANNUAL REPORT 2022 108 108 OTP BANK Medium and large enterprises Assets by sector, on-balance sheet exposure to own customers without leasing and consolidation, 31.12.202231 Agriculture, forestry, fishing Mining, quarrying Manufacturing Electricity, gas, steam and air conditioning supply Water supply; sewerage, waste management and remediation activities Construction Wholesale and retail trade; repair of motor vehicles and motorcycles Transportation and storage Accommodation and food service activities Information, communication Financial and insurance activities Real estate activities Professional, scientific and technical activities Administrative and support service activities Public administration and defence; compulsory social security Education Human health and social work activities Arts, entertainment and recreation Other services Not classified Total (HUF billions) BUSINESS REPORT 2022 (CONSOLIDATED) Hungary Bulgaria Croatia Serbia Russia Ukraine Slovenia Romania Montenegro Albania (with Alpha Bank) Moldova 5% 0% 10% 8% 0% 5% 14% 4% 3% 0% 9% 15% 5% 2% 4% 0% 26% 10% 1% 5% 19% 6% 5% 4% 1% 11% 7% 0% 3% 0% 0% 0% 7% 9% 2,772.0 1% 0% 1% 0% 0% 0% 1,194.9 4% 0% 15% 12% 2% 12% 12% 6% 8% 4% 1% 2% 3% 1% 15% 0% 1% 0% 0% 0% 962.9 7% 7% 20% 14% 0% 7% 18% 6% 1% 7% 0% 6% 1% 1% 4% 0% 0% 0% 0% 1% 989.0 3% 1% 15% 0% 3% 14% 36% 0% 0% 0% 3% 23% 2% 0% 0% 0% 0% 0% 0% 0% 57.4 18% 0% 28% 0% 0% 0% 38% 6% 0% 3% 0% 5% 0% 0% 0% 0% 0% 0% 0% 0% 300.8 2% 0% 28% 13% 1% 1% 19% 12% 1% 5% 4% 3% 2% 1% 7% 1% 1% 0% 0% 0% 455.8 18% 0% 13% 2% 1% 12% 17% 4% 3% 0% 6% 17% 1% 1% 2% 0% 1% 0% 0% 0% 563.7 1% 0% 4% 1% 0% 9% 33% 2% 21% 0% 1% 0% 1% 1% 26% 0% 0% 0% 0% 0% 243.5 1% 2% 9% 14% 0% 9% 26% 0% 4% 5% 1% 1% 0% 2% 2% 1% 2% 0% 5% 16% 199.5 8% 0% 18% 0% 0% 2% 45% 2% 0% 5% 6% 4% 1% 0% 2% 1% 7% 0% 0% 0% 80.1 The environmental and social risks of economic activities are defined for Level 4 NACE codes. All activities are high-risk within the Mining and Quarrying sector group. In the case of the activities involved in Real Estate Activities, Administrative and Support Services, Human He alth and Social Work Activities and Other Services, the highest consolidated environmental and social risk rating is medium. Professional, Scientific and Tec hnical activities are low-risk activities. The risk rating of activities in the rest of the sector groups ranges from low to high. Exposure calculations are not based on Schedule RC-C and Schedule RC-I, and the classification is not in line with the NAICS classification. 31 The table contains the data of only those sectors whose share is above 0.5 percent. Because of that and because of rounding, not all columns add up to 100%. Industrial classification is according to UN (ISIC) classification. Company sizing complied with the relevant legal categorisation. INTEGRATED ANNUAL REPORT 2022 109 109 OTP BANK BUSINESS REPORT 2022 (CONSOLIDATED) 3. FINANCIAL WELFARE, RESPONSIBLE CUSTOMER SERVICE GRI 3-3 Impacts: Financial welfare: As well as with its products, the Banking Group can contribute to financial welfare and to enabling customers make the best possible financial decisions in their particular situations in life, by the way in which it provides its services. The extent to which the conditions and requisites for responsible management of funds are given or limited is affected by the group's practices, as well as by the financial and social conditions of the customers themselves. Equal opportunity in accessing financial services: Accessibility is one of the basic prerequisites for financial welfare: A positive social/economic impact can only take place if disadvantaged groups can also manage their finances effectively – by making a reasonable effort – through digital channels, at branches or through ATMs. The previous chapter described the products available for vulnerable groups. Objectives: Correct and fair information and customer service Transparent and understandable product structure Making tools and knowledge enabling good financial decisions available Barrier-free service provision for persons with disabilities Accessibility even for socially and economically disadvantaged people Acts: Development of practices relating to responsible marketing communication Highly visible information in plain language Thorough exploration of customer situations and requirements Responsible selling and product offers Provision of services for Ukrainian customers in both Ukraine and abroad Videos presenting banking products and context Financial calculators Expanding online services Maintaining the option of personal customer service, strengthening the advisory function Developing accessibility Stakeholder involvement/compliance: reviewing customer feedback/exploring their needs, mystery shopping, complaint management, cooperation with civil professional organisations. For more details on our principles and overall objectives, please visit @our website. 3.1. Responsible communication and sales ST10: 3-3 The provision of information on, and communication regarding, banking products and services is a heavily regulated segment in most of the countries in which the OTP Group has its subsidiaries. The members of the banking group spare no effort to always comply with the changing regulations; moreover, they keep using their best effort to provide adequate information year in year out. The OTP Group aims to make sure that the products it offers and sells to its customers are aligned to their situations in life and their needs, and help them achieve their financial objectives. Straightforward communication continues to be one of the main pillars of customer orientation. We go out of our way to ensure that our messages are understandable and help customers keep informed and select the products that best suit their needs. OTP Bank worked out in 2022, and posted on its website, its @Responsible Marketing Policy, in which it laid down the basic principles of fair commercial communication and of the provision of correct information and product offering. The policy also sets out the principles of sustainability and non-discrimination. INTEGRATED ANNUAL REPORT 2022 110 OTP BANK BUSINESS REPORT 2022 (CONSOLIDATED) To facilitate the implementation of OTP Bank's @Consumer Protection Compliance Programme, launched in 2021, a checklist was put together setting out the requirements – in general and for each communication channel specifically – which must always be observed and complied with. The programme is supported by an IT system, strengthening transparency and retrievability. The Tone of Voice manual regulating the OTP Group's style of communication serves as a model and provides guidance for foreign subsidiaries when it comes to preparing their own respective manuals. 32 The use of plain language is prescribed in the manual as a basic goal and requirement. A guide, summing up the OTP Group's campaign and communication principles, has been put together, in which both customer orientation and sustainable operation appear along the most important objectiv es. To support customer oriented operation and easy-to-understand wording OTP Bank set out the process and principles of its naming practice regarding both its products and services. A number of internal training programmes took place at OTP Bank in 2022 as well, to ensure that as many as possible of our specialists engaged in external communication actually apply the above principles in practice. To continue basic training on easy-to-understand wording we developed a so-called advanced module as well. GRI 3-3 A style survey conducted in 2022 revealed that customers found OTP Bank's communication to be easy to understand and transparent on the whole and its tone of voice adequate, along with its appearance in terms of content and format. Customers found our promotional direct marketing e-mails to be the best. A number of our subsidiary banks improved their practices during the year. HR The Croatian subsidiary started to review and modify their documents to simplify their wording, clarify their structure and enhance their transparency. Moreover, the subsidiary bank produced information materials – videos, brochures, posters – regarding the introduction of the euro to help customers understand its impacts on banking products. In line with that, th ey modified the instructions concerning the use of various products and sent personal letters to customers with consumer loans explaining the impacts of the changes. The subsidiary also expanded the information provided for students, by explanations on ac count packages and products designed for them. An electronic product selection function was also created for them. RO The Romanian subsidiary prepared a guide summing up the main steps of taking out a mortgage loan to help customers understand the characteristics of this type of loan and prepare for applying for it. The leasing firm posted a questions and answers document and knowledge sharing articles on its website during the year. RU The Russian subsidiary POSTED a FAQ list in a plain and understandable language and set up a separate e-mail channel for communication with customers and partners, answering all questions regarding products, central bank restrictions and other matters. ME CKB deposited product information flyers in the branch offices describing each product separately, together with its advantages, in a clear, easy-to-understand and user-friendly manner. The banks of the OTP Group helped Ukrainian citizens fleeing their country by providing them with information and access to financial services in a variety of ways. Information and guide on how to open retail bank accounts was posted in Ukrainian on the main page of the parent bank's website. The terms and conditions applying to retail bank accounts are also available in Ukrainian, along with a questions and answers document. The subsidiary banks also feature their services and preferential terms and conditions offered specifically for Ukrainian refugees, in a dedicated form. In the branch network we made efforts to promptly serve Ukrainian customers. No substantial change was made to the Bank Group's sales process during 2022; it is aimed at identifying, and catering for, actual customer requirements, always in line with the relevant local regulations. In the incentive system the remuneration criteria are aligned to the local market environment, instead of being uniform across the Group. Improving financial awareness regarding banking services OTP Bank's mobile bank service has a Personal Finance Manager function making it simple and transparent for customers to keep an eye on their daily and monthly spending. The categorisation of expenditures was 32 It has been available for, and used by, the parent company for years now. INTEGRATED ANNUAL REPORT 2022 111 OTP BANK BUSINESS REPORT 2022 (CONSOLIDATED) automated by software development in 2022 and now more and clearer information is shown regarding spending items (e.g. the well-known brand name appears instead of the name of the service provider). It was in accordance with requests and requirements communicated by the customers that the Bank introduced the possibility of setting individual categories and rules. The fine tuning of automatic categorisation is an ongoing process. Every customer who has registered for the electronic service – more than 1.7 million – sees the Personal Finance Manager when logging in, therefore it is now widely known and used on a daily basis. The function is planned to be supplemented in the medium term with services aimed at achieving the sustainability goals. RS In 2022 the Serbian subsidiary bank also introduced the My Finance function in its InternetBank and MobileBank service to make monitoring and controlling expenditures easier. This function is also planned to be launched by all other subsidiaries of the Banking Group. Animation videos helping customers learn finance basics are also available on OTP Knowledge Bank's YouTube channel. The videos show the operation of various financial products and services in an easy-to- understand and illustrative manner with examples shown. The content is renewed and enhanced on a continuous basis; three new videos on general subjects – not specifically OTP Bank services – were produced in 2022, focusing on housing loans and what to do against data phishing. During the year, 26 short films dedicated to general financial education were available. They were supplemented by videos specifically presenting the services of OTP Bank. The short films with general content were viewed 26 thousand times in all. The Bank renewed its publication "Save Smart" (Gazdálkodjon okosan), the purpose of which is to educate customers, emphasise the importance of saving, self-provision and financial planning as well as describe the main characteristics of various forms of saving. The publication is available at OTP Bank's branches. OTP Bank pays particular attention to raising awareness and disseminating knowledge among customers regarding the use of new InternetBank and MobileBank channels. Before the first use of the service customers are shown an educational description they have to read on a mandatory basis. HR RS RO UA Several members of the Banking Group post basic financial literacy elements on their websites, with detailed explanations of banking products and practical advice, pointing out financial facts and relationships. The regularly updated contents also respond to topical situations and novelties (e.g. Covid, ESG). SI The Slovenian subsidiary uses its electronic channels on a regular basis for communicating educational messages. It has also conducted a communication campaign to enhance financial awareness on advertising surfaces as well. The Banking Group pays particular attention to developing young people's financial awareness. Sales objectives are sometimes intertwined with the dissemination of knowledge. The central theme of OTP Bank's junior account opening campaign in 2022 was that the Bank helps its customers make responsible financial decisions and accomplish their goals. The campaign included roundtable discussions to which the Bank invited influencers reaching both young people and their parents, and where current challenges facing young people were discussed. The Bank is continuously developing its OTP Junior Next application, whose primary purpose is to enhance 16-24-year olds' financial awareness and help them in making their career choices. The financial awareness raising content elements accessible in the application are updated on a continuous basis. Statistics show that the most popular functions are related to career guidance, conscious money management and OTP's new mobile banking functions. The new functions in 2022 included a quiz for developing financial literacy in the form of a game. The number of registered users of the application was nearly as large as 70 thousand at end-2022, 60 thousand them OTP's customers. The application is even more popular now than had ever been expected and the score of 4.6 in the application store is also favourable feedback. RS In 2022 the Serbian subsidiary started a TikTok channel with native videos demonstrating the use of the bank's products and services, primarily to young people. INTEGRATED ANNUAL REPORT 2022 112 OTP BANK BUSINESS REPORT 2022 (CONSOLIDATED) 3.2. Debtor protection ST1, ST10: 3-3 A number of conditions need to be met – from a correct assessment of possibilities to the Bank's prudent risk management, to an adequate regulatory environment – for borrowing to actually be the way forward. The extraordinary events of the past few years posed severe challenges to many of the borrowers; even the government took some strong actions to protect them through imposing stricter regulations on the conditions of lending and making repayments easier. The interest stop introduced in Hungary in 2022 further mitigated customers' interest risks and the system of certified consumer-friendly loans was also put in place for this purpose. These loans became a dominant product in the segment of real estate loans, and thereafter in personal lending as well. OTP Bank is no longer providing floating rate loans in the real estate segment. Nearly 50 percent of the personal loans disbursed in 2022 were Certified Consumer-Friendly Personal Loans. Of the loan repayment moratoriums introduced during the coronavirus pandemic the option of suspending repayments remained in effect in Hungary in 2022 for retail customers. Agricultural participants facing difficulties as a consequence of the extreme weather conditions and the price increases were also allowed to suspend repayments of their loans until the end of 2023. Customers were provided with information on a dedicated sub-page at @website on the choices relating to the moratorium and on repayments after its termination. Customers took this option in relation to about 4 percent of the total loan portfolio – about 40 thousand loans – until the end of the moratorium. Some 80 percent of this portfolio was made up of mortgage loans and personal loans. The Bank expects a significant proportion of the customers who made use of the moratorium to be facing risks of major payment difficulties, for which the Bank got prepared with its own debtor protection solutions. RO Of the countries in which group members are operating a new moratorium was introduced in Romania to preserve the good quality of the loan portfolio. The debtor protection programmes have been available for several years in the Group; they are used by debtors in relation to a small proportion of the total loan portfolio. A review of the programmes got under way in 2022 from the perspective of available solutions and the process itself. A video on the solutions available in the case of payment difficulties was produced and made available during the year through the Knowledge Bank channel described in the previous section. UA The Ukrainian subsidiary made it possible for private individuals to apply for loan restructuring on-line as well. To help customers who have lost their jobs and homes they suspended the obligation to make repayments for three months after the outbreak of the war. Proportion of past-due loans in the retail segment* (31.12.2022) Mortgage loan Consumer loan *more than 90 days past-due 3.3. Customer satisfaction OTP Core HUF 118 billion HUF 103 billion 6.7% 7.3% OTP Group HUF 214 billion HUF 385 billion 4.3% 8.7% GRI 2-29 The OTP Group explores the needs and requirements of its customers in a variety of ways, including asking for feedback on existing or prospective products and services, integrating the findings in product and service development. The satisfaction of our retail customers is measured with the standard TRI*M method across the Group, which some of the member companies supplement with the NPS or the SQM methodology. TRI*M gauges the overall satisfaction and loyalty of our own customers as well as customers of all of our major competitors, along with the main factors for satisfaction. Information is also analysed by customer segment (e.g. career starters, juniors, premium customers). We perform one measurement per year per country on a representative33 sample of 1,000 persons. No measurement took place in 2022 because of the war and the survey was put off to early 2023 in Moldova for the same reason. 33 Based on distribution by age, sex, education, municipality type, region. Online interviews were conducted in Hungary, Croatia, Romania, Serbia and Slovenia. Personal interviews were conducted in the rest of the countries. INTEGRATED ANNUAL REPORT 2022 113 OTP BANK BUSINESS REPORT 2022 (CONSOLIDATED) OTP Bank's customer retention score was 6634 in 2022, down 3 points year-on-year. Satisfaction also dropped – by five points from 2021 – among the competitors as well. The average TRI*M value of competitors was 72 points. Satisfaction improved among junior customers at OTP Bank, while at competitors it deteriorated, i.e. in this segment OTP Bank outperformed the average of its rivals. Due to the nature of the scale a few points' change cannot be regarded as significant. Satisfaction with the services provided by the members of the OTP Group increased in most countries; the greatest improvements were recorded in Serbia and Romania. A slight deterioration was observed in the case of the Slovenian and the Albanian subsidiary (down 3 and 2 points, respectively). The customer retaining capability of these two banks is still significantly stronger than that of their competitors. The Bulgarian subsidiary achieved the highest level of satisfaction. Overall satisfaction with banks is still well above the regional average in Bulgaria; satisfaction with DSK Bank was at the same high level in 2022 as well. The performance of the Romanian subsidiary is significantly affected by the fact that OTP is a secondary bank for most customers and satisfaction with their primary banks is typically significantly higher. It is clear in the case of OTP Bank Romania that customers opting for OTP as their main bank have better opinions of its performance. RU Our Russian subsidiary uses the Net Promoter Score methodology for assessing customer satisfaction. In 2022 the NPS was 1935, 7 points up year-on-year. The bank reached its target with this score. The performance of the subsidiary is significantly influenced by the fact that, focusing on consumer c redit, the Bank is typically a secondary bank for customers. The improvement in performance was enabled primarily by an increase in on-line services and accelerated processes, among other things. OTP Bank measures customer service (Service Quality Management, SQM) in retail and MSE (micro and small enterprise) branches by contacting customers online 36. The quality of service was nearly 88% in the retail segment and 93% in the segment of entrepreneur customers, each exceeding the targets set for 2022. SI The Slovenian subsidiary also uses the same technique; in 2022 satisfaction with service provision at branches, and through the contact centre, was 95 percent and 90 percent, respectively. RO The Romanian subsidiary introduced SQM measurement for customer interactions through the contact centre in 2022. Each customer giving a negative feedback is called by telephone to understand the reasons for dissatisfaction and make the necessary improvements. 3.4. Accessibility of financial services ST9: 3-3 Technological development creates an increasing variety of ways for doing business with customers as regards finances and the OTP Group continuously seeks for solutions for making the use of its services even more convenient for its customers with different needs and requirements. 34 The TRI*M score falls between -66 and +134 points. 35 On a scale of -100 to +100. 36 All branches are measured either on a semi-annual or on a quarterly basis. The number of questionnaires depends on the frequency of transactions in the preceding period. INTEGRATED ANNUAL REPORT 2022 114 OTP BANK BUSINESS REPORT 2022 (CONSOLIDATED) Our customers typically welcome the introduction of new possibilities and regard them as positive developments. UA Making the bank's services accessible posed a major challenge in Ukraine in the wake of the outbreak of the war but the efforts made by the personnel of OTP Bank Ukraine ensured that the Bank continuously operated even through its channels for in-person service provision, including both the contact centre and the branches. On its website and Facebook page alike, the Bank kept its customers informed on a daily basis of the list of branches open for business and operated a dedicated page on the website to communicate changes in banking services as a consequence of the war. Remote access through digital channels The expansion of digital channels is a continuous and long term trend. To satisfy customer needs and requirements as fully as possible the Group is expanding the range of remotely accessible services and functions. The use of the digital channels is encouraged by education as well. OTP Bank offers a new option in relation to real estate secured loans. Comprehensive expert information is available and applications can be submitted through the video bank function. But for the conclusion of the contract, all steps of the process take place on-line or by telephone. The contracts need to be concluded at branches for the time being, owing to statutory requirements. Customers using the video bank service took positive views of the process; in their feedback they highlighted flexibility, the pleasant customer experience during the transaction and the advisors' helpfulness, for example, in filling out documents. Information on real estate secured loans was provided via video bank about 50 times a month on average in 2022. The Bank has introduced a semi-digital account opening service for MSE customers; the contract itself is concluded at a branch office in this case as well because only a few types of business undertakings are allowed in the prevailing regulatory environment to conclude contracts on-line. The Bank has created and tested a process minimising customer presence for corporate customers as well by setting up an account managing centre, where businesses are provided with services through directly accessible account management contact persons. The process will be made available in all regions in 2023. Digital channels are growing more and more popular, as is indicated by the fact, for example, that the proportion of personal loan applications submitted on-line to OTP Bank increased from 30 percent at the beginning of the year to 40 percent by the end of the year. BG HR RS ME AL DSK Bank, CKB, OTP Bank Croatia, OTP Bank Serbia and OTP Bank Albania laid particular emphasis in 2022 on boosting the use of the digital channels and on automating cash transactions (e.g. deposit ATM), through educational and promotional campaigns. HR RS The Croatian subsidiary also introduced the video bank service and enabled on-line account opening through it – more than a thousand accounts had been opened on-line by the end of the year. Customer feedback was definitely positive in this case as well. The Serbian subsidiary also introduced its video bank service – they receive 500-1000 requests through this channel every month. RO The Romanian subsidiary introduced on-line account opening for micro, small and medium-sized enterprises in 2022 regarding 10 different account packages. AL The Albanian subsidiary's new on-line loan application service enables the submission of part of the documentation on-line, so customers do not have to call at a branch as many times as they had to before. The bank expanded the range of on-line payment functions as well. The Group's objective is to broaden the range of products that are partly or fully digitally accessible, paying attention to make sure that the processes are accessible as conveniently, and for as many customers, as possible. The Banking Group also lays emphasis on transferring the knowledge required for the use of the on -line channels. OTP Bank regularly sends educational messages, aligned to the customers' usage patterns; moreover, it also often shares such content on its own social media pages. A dedicated website shows all InternetBank and MobileBanking functions, in the form of screenshots and videos, together with useful tips for use. The bank advertised that website even through paying platforms; the demonstration of the advantages of our electronic services is also supported by external communication. We pay particular attention to providing information on methods of financial fraud. The educational messages appearing on the on-line channels facilitate secure and knowingly effected on-line financial transactions. Thanks to the Bank's efforts the number of digitally active customers has been steadily increasing. HR The Croatian subsidiary opened its Klik web application in 2022, turning authentication into a two-factor process, thereby enhancing security. The process of asking for indicative proposals for consumer loans is INTEGRATED ANNUAL REPORT 2022 115 OTP BANK BUSINESS REPORT 2022 (CONSOLIDATED) also made simpler and easier in the application. The Bank plans to introduce its new mobile application in 2023. In-branch and ATM service The OTP Group is at the service of its customers through its extensive networks of branches and ATMs – at the end of 2022 it operated about 1400 branches (@Staff level and other information37). The roles of both the branches and the ATMs are changing now but branches are still major customer service venues besides the increasingly complex digital channels. Functions available through these channels are also being continuously enhanced, the ways and modes of service provision being more and more closely adapted to customers' needs and requirements. GRI FS13 The Banking Group has the largest branch and ATM network in Bulgaria and Montenegro, and the availability of branches is outstanding in Hungary, Serbia and Moldova. As a result of the integration process we executed a major rationalisation process involving the closure of branches in Serbia in 2022; a substantial number of branches were also closed in Ukraine and Russia. 3 branches were closed in Ukraine on a temporary basis, because of the war. OTP Bank is operating a dedicated innovation branch as well, where we continuously seek and test innovations to simplify and digitise processes for our customers so that, on the basis of their feedback, we can provide services that suit customer requirements even better. The process of renewing service provision at branches is continuous within the Group. Renewal of service provision at OTP Bank's branches got under way in 2022, focusing on customer oriented dedicat ed consultancy based on appointments made in advance. Its most important element is deepening the relationship between bank officer and customer and the development of a long term relationship of trust while dealing with the customer. BG RS SI Consultancy functions gain dominance anyway in cashless branches, therefore in 2022 we continued to increase the number of such branches. At end-2022 there was a total of 13 cashless branches in Hungary, 4 in Serbia and 2 in each of Bulgaria, Romania and Slovenia. Transactions involving cash can be executed in such branches through smart ATMs. Also in line with the renewal of the customer service process we introduced at OTP Bank in 2022 an arrangement whereby customers can also pay real estate loan and building society charges and fees through POS terminals, using their cards. Digital devices also facilitate doing business at part of the branches in Hungary. The remote expert system was available at 117 smaller OTP Bank branches in 2022 for customers interested in taking out real estate loans. Residents of microregions are also provided with high standard services at branches through the system with the help of our highly experienced specialists, via videophone connection. A considerable percentage of our customers enquired in 2022 about state support possibilities. Through the in-branch VideoBank service, customers can contact branch employees on-line from their homes. In 2022 we extended the system to provide general information for MSE customers. The Banking Group is continuously increasing the number and proportion of ATMs because they are suitable for the provision of a wide variety of other financial services besides taking cash deposits. The amount deposited through ATMs increased in Hungary by more than 25 percent year-on-year, partly as a result of a dedicated marketing campaign. The number of smart ATMs increased in 2022 by more than 20 percent to 330; by the end of 2023 Q1 there will be such machines in place at every single branch. The increase in the number of ATMs continued at a number of our subsidiaries; more than 1,100 (~25%) deposit ATMs are available for customers across the Group. GRI 3-3, FS13 Owing to its extensive branch network, , OTP Group provides greater access to the population of disadvantaged regions in several countries for handling finances in person 38. 37 In addition to the above, OTP Pénzügyi Pont and OTP Ingatlanpont have 6 and 32 customer service points, respectively, and Merkantil Bank has one branch. The figures in the referenced chapter also include the figures of the former Alpha Bank for OTP Bank Albania. 38 For competitors, the organisation only has information on all access points. INTEGRATED ANNUAL REPORT 2022 116 OTP BANK BUSINESS REPORT 2022 (CONSOLIDATED) Access points in disadvantaged regions* Branch ATM 28 (7%) 0 (-) 2 (3%) -7% 42 (16%) 2 (40%) 2 (7%) 0% 187 (10%) 5 (12%) 5 (6%) 0% 8 (5%) 0 (-) 1 (3%) -11% 15 (31%) 0 (-) 0 (-) 0% 67 (19%) 0 (-39) 1 (25%) -1% 20 (18%) 0 (-) 0 (-) 0% OTP Bank – Hungary** Number of access points (as a % of the total number of access points) Number of new access points (as a % of all new ones) Number of terminated access points (as a % of total terminated) Change from the previous year DSK Bank – Bulgaria N/A – there are no disadvantaged regions defined OTP Bank Croatia Number of access points (as a % of the total number of access points) Number of new access points (as a % of all new ones) Number of terminated access points (as a % of total terminated) Change from the previous year % OTP Bank Serbia Number of access points (as a % of the total number of access points) Number of new access points (as a % of all new ones) Number of terminated access points (as a % of total terminated) Change from the previous year % SKB Bank – Slovenia Number of access points (as a % of the total number of access points) Number of new access points (as a % of all new ones) Number of terminated access points (as a % of total terminated) Change from the previous year % OTP Bank Romania Number of access points (as a % of the total number of access points) Number of new access points (as a % of all new ones) Number of terminated access points (as a % of total terminated) Change from the previous year OTP Bank Ukraine*** Number of access points (as a % of the total number of access points) Number of new access points (as a % of all new ones) Number of terminated access points (as a % of total terminated) Change from the previous year % OTP Bank Russia Number of access points (as a % of the total number of access points) Number of new access points (as a % of all new ones) Number of terminated access points (as a % of total terminated) Change from the previous year % CKB – Montenegro**** Number of access points (as a % of the total number of access points) Number of new access points (as a % of all new ones) Number of terminated access points (as a % of total terminated) Change from the previous year % OTP Bank Albania N/A – there are no disadvantaged regions defined OTP Banka Moldova**** Number of access points (as a % of the total number of access points) Number of new access points (as a % of all new ones) Number of terminated access points (as a % of total terminated) Change from the previous year % * Sub-regions and districts defined as such under the laws of each country, determined according to social and demographic indicato rs, and indicators related to housing and living conditions, the local economy and labour market, infrastructure and the envir onment. ** At this time, the branches/offices of OTP Ingatlanpont, OTP Pénzügyi Pont, OTP Merkantil and OTP Faktoring are not present in disadvantaged regions. *** As a result of the war, no reliable statistics are available on the current populations of cities and towns – therefore the subsidiary could not report data. **** The classification methodology has changed. As a consequence of the change, a number of town s and villages were shifted into the disadvantaged category in Moldova. 42 (43%) 0 (-) 0 (-) 0% 8 (7%) 0 (-) 5 (19%) -38% 0 (0%) 0 (-) 0 (-) 0% 2 (3%) 0 (-) 0 (-) 0% 5 (-) 0 (-) 0 (-) 0% 16 (20%) 0 (-) 0 (-) 0% 48 (31%) 6 (100%) 0 (-) +14% 8 (4%) 2 (12%) 3 (12%) -11% 14 (9%) 2 (7%) 0 (-) +180% 2 (2%) 0 (-) 0 (-) -33% n.a (-) n.a (-) n.a (-) n/a 3.5. Accessible customer service ST9: 3-3 Even as we specified in our accessibility strategy, we are making efforts to provide equal access for persons with disabilities through service provision adapted to their special needs. OTP Bank's branch personnel participated in mandatory on-line sensitising training in 2022, with contribution from the civil society organisation for inclusion called Egy sima egy fordított – Egyesület az Inklúzióért. A total of 89 percent of the approx. 4,000 employees concerned had completed the training by the end of the year. The Bank made the training material available for the headquarters employees as well and encouraged the completion of the training through an internal campaign. A three-hour in-person sensitisation training was 39 None, not applicable. INTEGRATED ANNUAL REPORT 2022 117 OTP BANK BUSINESS REPORT 2022 (CONSOLIDATED) delivered in 2022 to smaller group of administrative employees working in the Bank's busiest branches. The participants gave highly positive feedback on the training. MKB carried out mystery shopping at branch offices during the year, to test accessibility, finding that staff members are very helpful when it comes to dealing with persons with disabilities. The identifiability of special service needs is particularly important because in cases where the customer's involvement was not obvious, the Bank's employees were less able to provide the required assistance. The characteristics of the various disabilities and the applicable methods of communication were summed up for the employees based on the lessons drawn from the mystery shopping exercise. An aggregated tutorial was prepared regarding the means and methods of communication our employees can rely on when providing banking services for customers with various disabilities. Specialists were engaged in designing and reviewing the accessibility of digital platforms. From the results of the research we set ourselves an aim of making sure that regardless of the type of the disability, or the age, or the schooling attainment, of the customer concerned, the platforms and functions should be equally understandable for all. Implementation is also facilitated by the availability of the widest range of concrete format proposals, supporting functions that can be integrated and communication channels. Our customers were provided with services with the help of the following already proven means and instruments: We assist our customers with reduced mobility as follows: • Physical accessibility is provided in all branches in Hungary, with one exception40. All branch offices are barrier-free in Slovenia. With the exception of the Serbian and Albanian subsidiaries, more than 50% of the branches at our subsidiaries are accessible for people with reduced mobility. 78 percent of the branches of the Banking Group are accessible for customers with reduced mobility. • We also strive to make ATMs wheelchair accessible. • The OTP Bank website supports one-handed use. We assist our blind and visually impaired customers as follows: • There is a tactile push button on the branch ticket dispenser at every branch of the parent bank with ticket dispenser, to enable our visually impaired customers to signal their arrival. A tactile strip helps locate the push button and navigation is assisted with Braille signs. The same solution is available in almost all branches of our Russian subsidiary. • Tactile guide strips are available in 138 OTP Bank’s branches, while all of our Russian branches have a tactile sign at the entrance. • Nearly all of our ATMs feature Braille script at Group level. The number of ATMs equipped with text- to-speech software increased at OTP Bank: 1,059 terminals (57%) switch to speech mode automatically when earphones are plugged into the device. Some ATMs of our Moldavian subsidiary also provide audio assistance. We assist our hearing impaired customers as follows: • In Hungary, KONTAKT Interpreter Services can be used by customers in 167 branches; this service enables a sign language interpreter to assist with administrative tasks in the branch through live video chat. Experience shows that the rate of its utilisation is rather low therefore we aim to raise awareness, and increase the use, of this particular service in 2023. This option is available to customers in 24 branches of our Serbian subsidiary. • We equipped 109 designated branches of the parent bank with mobile amplifiers for customers using hearing aids. • Two branch employees from each of OTP Bank’s larger branches in Budapest and at county seats have now attended sign language training to learn basic sign language as well as specific banking phrases. 29 branches of the Serbian subsidiary have employees with sign language skills. • Digital accessibility has been implemented most extensively at OTP Bank and Merkantil Bank 41. The Web Content Accessibility Guidelines – WCAG 2.1 "A", and in some cases "AA" level recommendations – were taken into account in the design and development of the website and in content editing, to facilitate navigation with alternative devices as well as the use of text-to-speech software. "AA" level conformity is our target for the InternetBank function. An even higher level accessibility is planned to be accomplished in 40 Accessibility is not feasible at this branch due to the listed building regulations and the characteristics of the building and its environment (there is a significant height difference between street level and the branch floor level, connected by stairs). 41 The company only has a website. INTEGRATED ANNUAL REPORT 2022 118 OTP BANK BUSINESS REPORT 2022 (CONSOLIDATED) the case of the mobile application. Wherever feasible, our target is the "AAA" level. Verification of the conformity of earlier implemented InternetBank and MobileBank functions has got under way. OTP Lakástakarék, OTP Otthonmegoldások and OTP Alapkezelő are planning to factor in accessibility considerations right from the design stage in the next due renewal of their websites. These are the Hungarian subsidiaries of the Group where accessibility is the most relevant for service provision. The foreign subsidiaries have implemented, for the most part, partial digital accessibility. HR The Omoguru widget (mini app) is operating on the website of our Croatian subsidiary; it helps customers suffering from dyslexia and reading difficulties understand the content of the website. The InternetBank and the MobileBank services comprise functions facilitating access for visually impaired users. RS, BG, SI The digital platforms of our Serbian subsidiary include functions for visually impaired users to help them understand the processes and they plan to subtitle their videos in the future. DSK Bank's website is accessible for visually impaired users. The website and the InternetBank function of the Slovenian subsidiary does not support automatic display change. The Romanian subsidiary's platforms are also partially accessible. RU The Russian subsidiary offers a variety of options for intellectually disabled customers. INTEGRATED ANNUAL REPORT 2022 119 OTP BANK BUSINESS REPORT 2022 (CONSOLIDATED) 4. ETHICAL BUSINESS PRACTICE GRI 3-3 Impacts: Compliance awareness; tax payment; prevention of money laundering, anti-corruption activities and non-discrimination: through our practices we affect the reliability of the financial sector, our employees' standards of ethics, their morale, and the prevalence of (financial) crime in general. Data security: secure processing of data affects our customers' material welfare as well and we also influence the general levels of financial crime. The greater our weight in the market, the greater impact we may have; by introducing good practices however, even a smaller market participant can have a pull effect on the sector. Objectives: Maximum legal compliance, ethical operation Acts: Prevention of corruption and money laundering, investigation and management of detected cases Comprehensive, quick and fair customer complaint management The best possible protection of the data and IT systems of our customers Proper payment of our tax liabilities Operation of compliance officer network Further development of the system in place for internal communication of information on changes in the relevant legislation Establishment of minimum compliance standards to be met by all members of the Group Development of the sanctions pre-screening function Operation of Code of Ethics and whistleblowing system Fair complaints handling Internal cyber security audits Security awareness raising among customers/residents and employees Continuous development of security systems and work processes, training of our employees Stakeholder engagement/compliance: Cooperation with financial control/supervisory/audit bodies and authorities, and the police, in relation to the prevention and detection of crime. Complaint management, and cooperation with the Financial Arbitration Board. For our core principles and comprehensive objectives relating to compliance 42 and security, see @our website). 4.1. Compliance and adherence to laws and regulations GRI 3-3 We consider it a fundamental principle to adhere to the law, international standards and norms and ethical requirements. GRI 2-13 Under our group level Compliance policy, we must place emphasis on the prevention of breaches of compliance at all times. When an action or incident constituting a breach nevertheless occurs, we take appropriate and effective measures in order to address it. We are operating a group-wide compliance officer network. The Head of Compliance reports on compliance quarterly to the Bank’s Board of Directors, and annually to its Supervisory Board. An abstract of the policy is accessible on the Bank's @website. A competition law policy was prepared in 2022, which is also accessible here @website. We are continuously monitoring the EU regulations and changes taking place in the regulatory environment (including the requirements of the European Banking Authority (EBA), the European Securities Market 42 Compliance with legislative requirements and international norms and standards on ethical business conduct INTEGRATED ANNUAL REPORT 2022 120 OTP BANK BUSINESS REPORT 2022 (CONSOLIDATED) Authority (ESMA), the European Central Bank (ECB)) and process pieces of legislation applying to the Banking Group and/or its operation. In line with the recommendation made by the MNB on the basis of its comprehensive audit OTP Bank has modified its system for the internal communication of information on changes in legislation. Every internal regulation officer of the Bank has, since 2022, been immediately notified of the release of the summary of changes in legislation. In this way they are able to more quickly respond to chan ges in legislation. After the introduction of the single compliance policy we identified the identical minimum standards to be met by all members of the Group and the areas where the same practices are to be applied across the Group. Such minimum standards are continuously communicated to the subsidiaries in a prioritised order. The first package was introduced in 2022 regarding customer protection on the one hand (including complaint monitoring, consumer protection audits and the management of requests from the supervision) and the areas ensuring capital market compliance on the other hand. In capital market compliance the integration of two internal software functions enable more effective insider trading and market monitoring activity and personal transaction controlling. The first line of defence was reinforced by introducing the World-Check On-line service supporting sanctions pre-screening and the checklist supporting the evaluation of the screening results, across the Group. OTP Bank's relevant employees are provided with intensive training in relation to sanctions pre- screening. During the compliance risk assessment performed annually in two separate cycles, we did not identify any high risks in 2022 that would require group level action. The assessm ent of ethical and corruption risks is also part of the risk assessment process. The result of the assessment is forwarded to the Group Operational Risk Management Committee and it is also a part of the annual Compliance Report. Where high-risk areas are identified, we expect the relevant functional areas to draft and implement action plans. The compliance risk assessment system is supported by an IT application. Of the risks assessed at OTP Bank in 2022the highest risks were identified in the case of consumer protection, conflicts of interest and transactions under sanctions/sensitive transactions, while in the second half of the year the highest risks were identified in incentive management regulated by MiFID2 and the Chinese Wall. None of them exceeded, however, the level above which an action plan would have had to be prepared. Enhancing compliance awareness ST13: 3-3, 2-15 Training the employees – based on identical principles across the Group – is one of the key elements of enhancing compliance awareness. The training of the employees is monitored and where deficiencies are identified, arrangements are made to update or transfer knowledge, as necessary. Special training courses are also provided on a continuous basis with a focus on specific compliance topics. Mandatory compliance trainings at OTP Bank: • Compliance orientation material – Content: compliance function and organisation, ethics and conflicts of interest, personal transactions, market abuse, "Chinese wall" rules – Timing: a mandatory requirement for every newly hired employee when they come on board. • Compliance I training material – Content: compliance risks and policy, Code of Ethics, non-discrimination and conflicts of interest, forms of insider trading and market abuse – Timing: annual refresher • Consumer protection training – Content: main rules and their application, damage to reputation, customer loss, avoidance of consumer protection fines – Timing: annual refresher • Data protection training – Content: the importance of data protection, data protection organisation at the Bank, processing of personal data, data impairment – Timing: annual refresher • Risky transactions – Content: transactions under sanctions and sensitive transactions – Timing: annual refresher The compulsory training courses are followed by tests in which a score of at least 70% is required. Failure to complete the training may – after several warnings – result in consequences under the labour law. Compliance awareness raising took place at OTP Bank through the following channels: • A series of articles on the internal communication portal (Intranet): in 2022 on the Framework for reporting unethical conduct, the Code of Ethics, reporting of ethics infringements, Gift Policy and Social Media Policy. • Newsletters for the Compliance Officer Network • Compliance Officer Forum: SharePoint based IT platform with important information, training materials and newsletters. INTEGRATED ANNUAL REPORT 2022 121 OTP BANK BUSINESS REPORT 2022 (CONSOLIDATED) • Compliance Officers' Professional Conference: annual professional training with a focus on key compliance topics, current matters, changes in regulations, best practices, discussion of case studies. 95 percent of the participants said that the information shared during the conference contributed to the growth of their compliance awareness. • An e-learning course was delivered on insider matters. In addition to the generally applied practices: BG The Bulgarian subsidiary delivered targeted compliance training courses in 2022 on subjects including sanctions, conflicts of interest and data protection. HR The Croatian subsidiary joined the code of ethics – issued by the Ministry of Economy – on the transition from the kuna to the euro. AL The Albanian subsidiary delivered an intensive compliance training course after the merger for the former Alpha Bank employees. An awareness raising campaign was conducted among employees concerning the importance of reporting of ethical offences. Code of Ethics and reporting of ethical offences GRI 2-23, 2-24, 406: 3-3 The basics and principles of ethical business conduct is summed up in the Code of Ethics. The Code was supplemented by matters of relevance to ESG inter alia, in 2022. All employees were notified of the changes. GRI 205-2 All new employees, executive officers and sales agents must sign our Code of Ethics; moreover, its acceptance is a mandatory element of the supplier contracts at OTP Bank and a number of subsidiaries. Some of the Banking Group members run dedicated training courses about the Code of Ethics. Completing this course is mandatory for new hires and sales agents within a certain time limit from starting to work. Both the Code of Ethics and conflict of interest are compulsory parts of the annual compliance training; GRI 2-26 Every bank of the OTP Group operates a whislewblowing system. The conditions for filing whistleblowing reports and the relevant contact information is provided in the publicly available Codes of Ethics on the Banks’ websites, and additional detailed information is provided on the parent bank’s website in a separate document entitled @OTP Bank Plc.’s whistleblowing system. Such reports can be filed in each country in its official language. Reports received by complaint management regarding matters of relevance to the Code of Ethics or the Bank as a whole are transferred to the Ethics Department on the basis of a separate rule. OTP Bank tested this process in 2022 and the complaint management department was provided with specific targeted training to prevent shortcomings. This resulted in an increase in the number of report on ethics offences. A total of 198 notifications were made in the Group in 2022 through the ethics hotlines, more than two and a half times the number of notifications recorded in the preceding year as a consequence of an increase in the number of cases at OTP Bank. Together with cases carried over from previous years, a total of 203 reports were closed, of which only 79 cases were qualified as ethical issues. Ethical offences were identified in 12 cases, nine of which had occurred at OTP Bank, one at DSK Bank, one at SKB Bank and one at OTP Faktoring – i.e. no large number of cases occurred at any particular Group member. One case of harassment was reported at DSK Bank. It was found to have been well-founded. Disciplinary action was taken against the employee who had perpetrated the harassment. Discrimination is prohibited by the Code of Ethics. The Bank is making efforts to create a working environment in which individual differences are accepted and appreciated. Any negative discrimination based on a person's actual or perceived characteristics or traits is prohibited. GRI 406-1 Four reports relating to discrimination were submitted at OTP Bank, three at the Romanian subsidiary. Each of the seven cases were investigated by the companies concerned – none of them was well-founded. GRI 410-1 78 percent of the security guard personnel employed through subcontractors are provided with training on the Code of Ethics – including requirements pertaining to human rights – across the Group. Such training is fully provided at OTP Bank and the Albanian, Moldavian, Russian, Montenegrin, Croatian, Serbian and Ukrainian subsidiaries. No such training is delivered at the Bulgarian and the Romanian subsidiary. In Slovenia the employer of external security guard personnel accepts the Code of Ethics as binding on itself and provides for its observance. As many as 88 percent of the security guard personnel – including security service staff employed by the bank – are provided with training on the Code of Ethics. INTEGRATED ANNUAL REPORT 2022 122 OTP BANK BUSINESS REPORT 2022 (CONSOLIDATED) Anti-corruption activities GRI 205: 3-3 The OTP Group is committed to combating corruption, and declared zero tolerance towards all forms of bribery and the gaining of unfair advantages as part of the Compliance Policy, attached to which is the @Anti-corruption policy. The policy lays down the principles of the Group’s anti-corruption activity, identifies the areas particularly exposed to the risk of corruption and serves as a core document for the formulation of the regulatory documents required for the Banking Group’s anti-corruption efforts and for the anti-corruption activity of the employees concerned. The basic principles and provisions laid down in the policy are applicable across the whole of the organisation of each group member, fully covering all facets of their operations from the drafting of their internal regulatory documents, to the contracts to be concluded with their partners, to all actions of every individual employee, in all of the activities of the group members. The scope of the policy covers all employees and contracted partners of the group members as well as all other persons participating in the performance of their activities in any way. GRI 205-2, 2-15 OTP Bank’s Code of Ethics also defines and prohibits all activities involving, or relating to, corruption and lays down rules relating to gifts. The annual compliance training covers the fight of corruption as well, via the Code of Ethics. About 98 percent of the contractual partner were provided with information on the relevant provisions of the Code of Ethics and the Anti-Corruption Policy during the year – either directly or on the websites of OTP Bank and its subsidiaries 43. GRI 205-1 As part of compliance risk assessment the Banking Group also carried out a corruption risk assessment in 2022. The risks of corruption were assessed at 540 (84%) of the 640 organisational units 44 of the Group. The risk of corruption is low; a modest risk was identified in some special segments (e.g. in the management of large corporate customers). GRI 205-3 There was no confirmed incident of corruption or any public legal case involving corruption in the Banking Group in 2022. Thanks to targeted awareness raising and the warnings awareness regarding the accepting of gifts improved considerably at the relevant divisions of OTP Bank in 2022. Employees reported a total of 653 gifts in 2022 (2021: 382). OTP Bank plans to send a so-called transparency letter from 2023 to its partners in relation to its organised events to inform them of the value of the invitation and of the fact that the event concerned is aimed at strengthening business relationships. Lobbying It is predominantly through the Hungarian Banking Association and the Association of Investment Service Providers that OTP Bank participates in the reviewing of legislation concerning the financial sector and coordinating that review process. It also takes part in the work of the Corporate Governance Committee of the Budapest Stock Exchange. In 2022 we expressed our opinion for example on matters of relevance to the regulation of electronic documents, topics relating to the preparation of the new legislation on the land register, ESG compliance and bank digitalisation, along with legal regulations on the extra profit tax, the interest stop and moratoriums, through the Hungarian Banking Association. We also participated in the cooperation aimed at facilitati ng the Banking Association's lobbying activity, in the form of expressing our opinion on draft EU regulations and proposals on matters involving the Bank/Banking Group. Foreign subsidiaries are also members of local banking associations, while our Croatian subsidiary participated in public consultations organised by advocacy organisations. Supplier qualification Suppliers are pre-qualified by OTP Bank if the value of the procurement is expected to exceed a gross amount of HUF 1 million or, in the case of IT procurements, HUF 3.6 million. The pre-qualification system requires that the supplier has no public debts and that it complies with statutory requirements regarding health, security and environmental protection. Sanctions screening was integrated in the qualification process in relation to the war in Ukraine. The extensive pre-qualification system was introduced in 2022 at SKB Bank, in Albania and at DSK Bank. Minimum pre-qualification standards were introduced at the other subsidiaries. 43 Exceptions are a few small subsidiaries which do not have websites. 44 The number of the organisational units of only the companies that participated in the assessment. Corruption risks were assessed among subsidiaries subject to consolidated supervision with OTP Bank Plc., covered by the group governance function of OTP Bank Plc.’s Compliance Directorate. INTEGRATED ANNUAL REPORT 2022 123 OTP BANK BUSINESS REPORT 2022 (CONSOLIDATED) At OTP Bank the handover of the data protection requirements and the data protection templates was brought forward to the beginning of the procurement process so that partners and suppliers can review them in an early phase of procurement. GRI 2-6, 205-2 The procurements of the OTP Group are related primarily to making sure that the requisites for the performance and sale of services are available. OTP Bank's procurement policy declares the requirement of responsible and ethical conduct on the part of suppliers (see above, Anti-corruption activities). OTP Bank cooperated with as many as 4,564 suppliers in 2022. The OTP Group had approx. 20,000 suppliers. The procurement strategy assigns special significance to sustainability considerations. The aim is to maintain business relations only with suppliers and entrepreneurs that undertake environmental and social responsibility in compliance with Hungarian and international treaties, standards and laws. The environmental aspects of procurements are listed in the Bank’s Environmental Policy. Details on our procurement principles are available on @our website. Proceedings by authorities, and other legal procedures GRI 2-27 There were 3 major45 cases dealt with by authorities/legal cases involving the Banking Group in 2022, two of which were closed and one remained pending: • The decision closing the comprehensive audit started by the MNB in 2021 was handed over to OTP Bank and its domestic subsidiaries in September 2022. In the wake of the comprehensive audit OTP Bank was fined HUF 55 million and the subsidiaries (Merkantil Group, OTP Lakástakarék, OTP Faktoring, OTP Jelzálogbank, OTP Ingatlanlízing) were fined another HUF 34 million, for shortcomings relating to IT security, credit risk, capital adequacy, corporate governance, supervisory data supply and deposit insurance, inter alia. • • OTP Bank Serbia was fined HUF 7.5 million by the National Bank of Serbia because its organisational structure did not adequately guarantee the prevention of conflict of interests, and transparent and documented decision making, in relation to the members of the managing bodies, and employees in managerial positions. Interchange case – procedure pending in 2022. The Hungarian Competition Authority (HCA) fined OTP Bank HUF 281 million in the so-called interchange fee case (together with Mastercard, Visa and some other banks) in 2009. OTP Bank challenged the decision before the court: by its final and binding judgement the court of the second instance annulled in March 2017 the HCA's decision, whereby it fined the Bank and ordered the HCA to conduct a new proceeding. That decision was upheld by the Curia and thus the year 2009 decision levying the fine was annulled for good. The amount of the fine paid by the Bank had already been repaid by the HCA. The competition authority instituted a new (repeated) competition supervisory proceeding against the entities concerned in June 2021, which was still in progress in 2022. The thematic audit of the moratorium was closed by the MNB without charging fines in the case of OTP Bank, OTP Jelzálogbank and OTP Lakástakarék alike. The MNB found infringements to have been committed by the Bank and OTP Lakástakarék but levied no fine because of they were minor infringements and were adequately and proactively taken care of. GRI 206-1 In 2022 the Romanian competition authority launched onsite inspections at 10 Romanian banks including OTP Bank Romania on account of their presumed conduct relating to the 3-month ROBOR (Romanian Interbank Offer Rate). The investigation has not been closed yet. 45 Major case: the fine charged in one case, or in multiple cases in aggregate, equals at least HUF 10 million. Cases in which no fine is charged are essentially not categorised as major cases, but our member companies may decide otherwise. INTEGRATED ANNUAL REPORT 2022 124 OTP BANK BUSINESS REPORT 2022 (CONSOLIDATED) GRI 2-27, 206-1, 417-2, 417-3 Closed proceedings by authorities, and other legal procedures, fines paid, 2022 OTP Bank OTP Group All closed cases All cases closed with fines Fine paid Fine charg ed for practi ce applie d in 2022 Fine charg ed for practi ce applie d in earlier period s All closed cases All case s close d with fines Fine paid Fine charg ed for practi ce applie d in 2022 Fine charg ed for practi ce applie d in earlier period s No. of items 0 0 13 29 HUF millions HUF millions No. of items 3 35 0 0 0 0 0 0 0 0 0 0 0 0 3.9 0 3.9 0 7.4 3 229 0** 11.8 violation of competition rules* violation of consumer protection rules violation of rules on equal opportunity (not under the labour law) supervisory procedures violation of IT security / Cyber security rules violation of taxation rules violation of environmental rules violation of marketing communication rules violation of information provision rules violation of data protection rules other proceedings Total 2022 Total 2021 Total 2020 Total 2019 Total 2018 There may be a significant cross-country difference between the administrative practices applied; hence the significant differences between the numbers of procedures. Data were presented in earlier years in a different way (in accordance with the GRI Standards 2016 requirements), therefore comparability is limited. * Also includes breaches of antitrust and anti-monopoly rules. ** The case was converted into a court case; that is why no fine was paid. *** Six of these are the above mentioned MNB fines, shown in this table at the group members concerned. 57.2 0 0 0 0 0 32.0 0 93.1 17.5 16.1 136.2 1,439.7 119.8 0 0.2 0 0 0 34.2 20.3 186.3 76.4 83.3 265.4 1,502.2 24 0 6 0 0 0 17 79 358 452 168 2,521 579 13*** 0 4 0 0 0 5 70 117 74 66 71 118 99.8 0 0.1 0 0 0 33.0 11.8 152.1 57.2 0 0 0 0 0 32.0 0 93.1 2 0 0 0 0 0 2 0 17 12 9 14 12 6 0 1 0 0 0 5 0 41 25 26 33 42 0 0 0 0 0 0 0 0 0 0 4.3 0 20.0 0 0.1 0 0 0 1.2 8.6 34.2 4.2. Complaint management GRI 2-25 We strive to achieve error-free customer service; we investigate and address the reported complaints. We aim to prevent complaints by continuously improving our practices. We are continuously improving our complaint management system. GRI 2-13 The regular (typically semi-annual) reports on complaints and their handling are also received by the top managers of our member companies. In order to prevent complaints, we assign great significance to the continuous training of our employees. In Hungary, we strive to investigate complaints faster than prescribed by legislation, and we aim to reduce response times. The range of the types of complaints that can be promptly resolved (in the case of which solutions, that are accepted by the customers as well, are immediately provided for the customers' claims) continued to be expanded at OTP Bank. A function for responding by e-mail was created for our customers who can be identified by e-mail address, thereby accelerating the procedure. E-mail messages on the status of their complaints are sent to customers. In the case of errors affecting multiple customers, or in the case of losses of larger amounts, the issue is notified to the division concerned and the progress of rectification is monitored. RO BG Measurements of customers' satisfaction with complaint management are conducted at OTP Bank and the Romanian subsidiary. The Bulgarian subsidiary plans to introduce measurement of satisfaction with complaint management in 2023. The results of the satisfaction measurements are monitored. According to our customers' feedback the way and effectiveness of complaint management is in the adequate range. INTEGRATED ANNUAL REPORT 2022 125 OTP BANK BUSINESS REPORT 2022 (CONSOLIDATED) The subsidiaries also enhance their practices continuously in order to improve complaint management; the enhancement of employees’ competencies is supported by trainings and consultations. The requirements and best practices relating to complaint management, and the operational recommendation for foreign subsidiaries were updated in 2022. Complaints handling procedures and definitions are being standardised across the Group and as a result, the data content of complaints handling gradually become more consistent. However, as cultural attitudes and financial literacy differ from country to country and shape customers’ complaint reporting habits, customer complaints data from different subsidiaries are not comparable. Customer complaints OTP Group Number of complaints closed Number of substantiated complaints Compensation paid (HUF million)* 2018** 2019 N/A N/A 170 N/A N/A 367 Amount of compensation per warranted complaint (HUF)* 1,100 2,300 2020 589 thousand 358 thousand 188 500 2021 513 thousand 274 thousand 131 480 2022 537 thousand 294 thousand 8,240*** 28,030*** Total number of complaints relating to accessibility Number of complaints related to product structure transparency * OTP Bank Croatia and OTP Bank Russia were unable to provide compensation figures. ** In the case of OTP Bank, reimbursed transaction amounts are excluded from the compensation total in 2018. *** HUF 7,947 million of the damages was paid by the Montenegrin subsidiary. For details, see subsection @4.4. **** 12,650 of which were registered by the Russian subsidiary; this included all complaints received in relation to the oper ation of the product. They do not keep records of complaints relating to accessibility, therefore the Russian, the Romanian and th e Montenegrin subsidiary, and the Financial Point, could not provide such data. No data could be provided regarding the transparency of the product structure b y OTP Bank, the Romanian and the Montenegrin subsidiary and the Financial Point. 12,751**** N/A N/A N/A N/A N/A N/A N/A N/A 2 Typical complaints, questions Other than complaints related to banking transactions (charges, fees, loan disbursements), unapproved payments were the most frequent subjects of complaints at OTP Bank in 2022. BG At the Bulgarian subsidiary most questions and complaints were about changed credit card limits, disputed on-line card transactions and banking charges. RS At our Serbian subsidiary most questions and complaints were related to monthly charge calculations, the new mobile application and the repayment and restructuring of loans. SI At the Slovenian subsidiary most questions were about on-line card transactions, digital fraud, deceptions and transactions that failed because of the war in Ukraine. RO At our Romanian subsidiary most questions and problems had to do with card and current account transactions, OTPdirekt log-in attempts and the introduction of Google Pay and Apple Pay. RU At our Russian subsidiary most questions and requests were about loans past-due and contract terms and conditions. UA At our Ukrainian subsidiary most questions related to the war: suspension of loan repayments, restructuring, cash withdrawal and transfers abroad. INTEGRATED ANNUAL REPORT 2022 126 OTP BANK BUSINESS REPORT 2022 (CONSOLIDATED) ME Most of the questions received by the Montenegrin subsidiary were about detected frauds (see subsection @4.4). MD Most of the questions received by the Moldavian subsidiary concerned cash withdrawal and the balances appearing in the mobile application. 4.3. Financial supports GRI 201-4 In 2022, the Banking Group received grants in four countries. Six subsidiaries of OTP Bank received grants in Hungary. The Merkantil Group was awarded EDIOP Labour market adaptation grant in relation to 240 employees, while MONICOMP was granted R&D grant. Nagisz Zrt, HAGE Zrt, Nemesszalóki Mezőgazdasági Zrt. and Nádudvari Élelmiszer Kft. were provided a total of HUF 1.8 billion in investment, agricultural and animal welfare subsidies. The Bulgarian and the Slovenian subsidiary received state aid for financing their electricity costs. The Croatian subsidiary and the Slovenian subsidiary received support for a trainee program, and for the procurement of COVID rapid tests, respectively. GRI 201-4 Financial assistance (HUF millions)* Hungary Bulgaria Croatia Romania Slovenia Total * The tax allowance granted on the basis of the Hungarian Banking Group’s sponsorship of spectator team sports and performing arts are not included here as it cannot be interpreted as financial assistance received by the Bank. 2022 2,364 721 5 0 74 3,164 2021 1,248 74 7 8 0 1,337 2019 167 0 3 3 0 173 2020 50 0 5 14 0 80 2018 0 0 0 0 0 0 4.4. Secure operation Safe and secure operation is a priority for out Banking Group. With that in mind, we assess and manage operational risks and ensure that we are strongly protected against fraud attempts. What with the expansion of IT services, IT and cyber security are becoming more and more important in the operation of our companies. In particular, fraud management and prevention has become crucially important. IT, cyber and bank security framework GRI 2-13 The IT and Bank Security Directorate reports annually on the security situation to the Board of Directors and Supervisory Board. It is a fundamental principle of OTP Group that the primary purpose of our measures is to prevent and inhibit security incidents. The principles and main guidelines concerning security at the Bank are set out in the Security Policy. The Information Security Policy defines, inter alia, the theoretical objectives and application areas of information security, the principles of risk assessment, the requirements of compliance and those of the security awareness training, and confirms the Bank’s commitment to the continuous enhancement of the information security management system. IT secu rity also includes cybersecurity. 2022 saw the elaboration of the Group Information Security Policy which will enter into force at the beginning of 2023 and which will be introduced by the foreign subsidiaries in 2023. In 2022 we executed the Banking Group's first Cyber Defence Programme, aimed at mitigating risks from the cyber space primarily by the provision of group-wide services. The details of information security risk management are laid down in the regulation on the regime of IT logical risk analysis. The methodology of risk analysis was profoundly renewed in 2022, therefore the mandatory biannual risk analysis will be carried out in 2023 on the basis of the new method. In the case of newly introduced systems, before going live we conduct an annual vulnerability test for IT systems classified into the two highest-level security classes; moreover, vulnerability tests are performed on a weekly and/or monthly basis for the supporting operating systems. Our independent organisational units vested with au dit rights conduct an internal audit on compliance with IT security objectives, the implementation thereof, and the successful adoption and maintenance of the requirements. IT security maturity assessment is carried out at our foreign subsidiaries once a year, their results are summed up in executive summaries. To effectively maintain information security we cooperate with the National Cyber Security Centre of the Special Service for National Security. The scale of the cyber security incidents is indicated by the fact that we investigated some 35 thousand alerts and 2100 data leaks, and managed 185 data phishing campaigns. INTEGRATED ANNUAL REPORT 2022 127 OTP BANK BUSINESS REPORT 2022 (CONSOLIDATED) Protection of customers' personal data GRI 418: 3-3 Protection of the customers' data is one of the most important dimensions of secure operation. Data protection and the protection and confidential processing of the personal data of customers are a basic and indispensable condition for the reliability of the Banking Group. The protection and processing of personal data are also a part of our Compliance Policy, in which the regular assessment of risks and the maintenance and improvement of awareness are also discussed. The Banking Group applies the most modern solutions continuously for data processing and data security and in order to prevent data leaks. At OTP Group banks, dedicated data protection officers and data owners are responsible for ensuring compliance with the data protection requirements (e.g. supervising personal data processing, principle of data minimisation, the processing of high-risk data). To this end, data owners participate, for instance, in annual professional training courses and in 2022 we organised a conference for data protection officers at OTP Bank which was also attended by the domestic members of the Group. The directive on the protection of personal data was renewed in 2022 on the basis of a process approach and the new directive was introduced by the domestic group members as well. We naturally provide our customers with complaint handling channels for the event of fraud suffered as a result of the data sharing practices of OTP Group, while suspected ethical offenses (including human rights offenses) can also be reported via our whistleblowing system. Of the justified data protection complaints received from external parties at OTP Group, 118 complaints involved OTP Bank Croatia, where personal data were disclosed to unauthorised persons due to the negligence of branch employees. GRI 418-1 Abuse of personal data 2018 2019 OTP Bank 2020 2021 2022 2018 20191 2020 2021 2022 OTP Group 0 number of substantiated complaints by external parties number of complaints by regulatory authorities number of breaches of customer privacy No. cases in which data were stolen number of times data were lost by the organisation 1 The Ukrainian subsidiary was unable to supply data. 2 99% are complaints associated with OTP Bank Russia. 0 6 0 0 0 0 0 0 0 3 6 0 0 0 0 0 0 0 0 0 0 0 0 0 11,0352 33 20 277 128 15 44 0 1 23 35 1,045 29 1 1 2 2 22 61 17 0 23 31 0 1 There is a considerable risk in on-line abuse based on deceiving customers – in such cases the customers themselves disclose their own confidential data (see the next heading). In 2022 we started a comprehensive revision of the process in place for the management of cases of abuse involving payment services, by carrying out the necessary organisational changes with effect from 2023. In addition to the Banking Group's high degree of preparedness and our employees' security awareness, our customers' security awareness also needs to be raised. OTP Bank is continuously working on developing customer education techniques. 2022 saw the launch of research on frauds aimed at stealing money from bank accounts. The main objective of this is to form a picture of the security awareness of an average Hungarian citizen regarding banking fraud to make it possible to identify points and methods for maximising the effectiveness of education. Moreover, we increase our communication activity when a new form of criminal behaviour is encountered – we immediately issue press releases, make interviews drawing attention to threats and send electronic direct marketing (eDM) mails to our retail customers. Both on our website and in the InternetBank we use chatbots to inform customers of phishing/abusive activities, safe and secure banking, debit card security and conscious borrowing. Tutorial videos will be produced in 2023. The subsidiaries whose customers fall victim of crime in typically higher proportions – primarily the Russian and the Bulgarian subsidiary – lay particular emphasis on raising their customers' security awareness. Awareness raising campaigns are conducted in Russia also in cooperation with the investigation authorities as well as other public bodies. Thanks to these efforts security awareness among the subsidiary's has increased and as a result of this and the bank's security measures the customers' losses stemming from criminal acts committed against them have decreased substantially. INTEGRATED ANNUAL REPORT 2022 128 OTP BANK BUSINESS REPORT 2022 (CONSOLIDATED) BG The Bulgarian subsidiary draws its customers' attention to, and educates them regarding, information security, in tutorial videos, on its website and in the social media. The Bank also participates in a campaign – in cooperation with the Bulgarian Banking Association – focusing on the subject of IT fraud. HR SI In cooperation with the Croatian Banking Association and the Slovenian Banking Association the subsidiary banks also participate in the awareness-raising activities of the European Month of Cyber Security. AL The Albanian subsidiary has implemented a social media campaign concerning secure on-line payment. The aim was to draw customers' attention to unsecure websites. Customers are also provided with information materials together with their new bank cards with advice regarding conscious on-line purchases and subscriptions. Security incidents and their management A considerable number of criminal acts or attempts are committed against customers by way of deception year after year. These cases have included, in particular, data phishing, abuse involving payment services by means of social engineering (psychological manipulation), fraud with the help of the information system, cases of fraud where customers are prompted to transfer money or otherwise. The amount of th e damage caused to the bank's customers by such crimes increased significantly in comparison to the preceding year. The most frequent methods of fraud in Hungary were various forms of phishing, including the navigation of customers to fake websites (e.g. counterfeit OTP internetbank page, fake websites of other businesses), by phone calls made on behalf of the Bank or by fraudulent advertisements. The Bank notified the competent authorities about the fraud and its attempt and conducted consultation and coordination with them to facilitate effective detection of cases. In the course of card-related attacks the sharing of important information was extremely helpful in the prevention of fraudulent transactions. OTP Bank prevented bank card frauds worth approx. HUF 5.0 billion. The ratio of bank card fraud to turnover is significantly lower than the European average published by Mastercard (for OTP Bank it is 0.0108% and the consolidated ratio of the subsidiaries is 0.0087%, while the European average stands at 0.0427%46). The total amount of the violations was HUF 1.9 billion at OTP Bank and HUF 2.4 billion across the Group47. The highest risk cases committed against the Banking Group included primarily credit frauds in the case of OTP Bank, while in the case of the foreign subsidiaries acts of abuse by employees, lending frauds and acts of violent crime (attacks against ATMs, bank robberies). 46 Issuer and the merchant side; the Mastercard data is for 2022 Q3. 47 Without SKB Bank's data because they were not available yet. INTEGRATED ANNUAL REPORT 2022 129 OTP BANK BUSINESS REPORT 2022 (CONSOLIDATED) Particularly severe cases of abuse by employees occurred at the Montenegrin, the Russian, the Ukrainian and the Bulgarian banks, whereby the employees concerned caused a total damage of HUF 2.66 billion to the Banking Group. The greatest losses were caused by lending frauds to the Slovenian, the Russian, the Croatian and the Serbian banks, while less severe losses were also suffered by the Ukrainian, the Romanian an the Bulgarian subsidiaries. By thwarting detected fraud attempts the subsidiary banks prevented losses of a total of HUF 807 million. Violent crimes caused damage primarily to the Croatian and Ukrainian subsidiaries. The most severe case of abuse by employees at the Banking Group occurred in Montenegro, when accounts of more than 200 customers were misused. As many as 17 employees were held responsible and more than 20 criminal charges were pressed in relation to the cases concerned. The Bank suffered losses of a total of HUF 2.57 billion as a consequence of internal frauds. The Bank made a thorough investigation of the background of the violations and prepared an action plan of 34 actions to prevent the occurrence of similar cases, of which the most important include: preparation of a more effective managerial control regulation, development of a set of procedures for the prevention of and responding to, internal fraud, setting up a branch network control group, • • • • working out and monitoring the scope and frequency of fraud alerts. To substantially mitigate the risk of fraud the Bank carried out a number of technical improvements. For instance, it automatically sends text messages to all of its retail customers on every disbursement of at least EUR 1,000. A number of steps were taken in 2022 as well to reduce violations: • An anti-fraud policy was prepared together with a Chairman & CEO Directive on the fraud prevention process. • An Anti-Fraud Competence Centre was set up at OTP Bank and on-line fraud prevention consultations with the subsidiary banks were strengthened. • Preparation of the introduction of the NIST Cybersecurity Framework at a group level: this helps understand, manage and mitigate cyber risks and strengthens the protection of the networks and the data. • The introduction of a central incident management – cyber threat intelligence sharing platform (MISP) was started at OTP Bank with the participation of the MNB and the NKI to gather, analyse and share information regarding cyber security incidents and malware. The system is planned to be introduced and used at every one of our subsidiaries in 2023. • Cyber threat information is continuously gathered through Cyber Threat Intelligence. Cyber Threat Hunting can proactively identify in the cyber space and the internal network. • Starting brand and supplier chain protection service across the Group (e.g. to identify fake OTP websites or facebook pages). • A working group was formed at OTP Bank – organised by the Security Operations Centre (SOC) – to seek for solutions against data phishing methods committed via IT devices and make proposals for business divisions for mitigating risks. • OTP Bank joined the Central Government Service Bus through which police data supply takes place mechanically. To evaluate the effectiveness of security activities in 2022 we started on-site audits of the foreign subsidiary banks. On-site audits were carried out at two subsidiary banks during the year. The results were summed up in executive summaries and in reports for the foreign top managers. Thematic audits were conducted three times, on virus protection, cloud services, authentication and access management, across the whole Group. The development of customer education was set as a medium term goal because this might bring about a material progress in fight against fraud. In this context we wish to cooperate with the authorities as well, so that basic IT skills relating to protection against data phishing should perhaps be integrated into schools' training materials on financial awareness. Awareness raising Since the awareness of our employees may result in the prevention of a lot fraud attempts, we laid particular emphasis on raising security awareness 2022 as well. A lot of the relevant activities were executed in October, in connection with the European Month of Cyber Security. That was when we introduced a mandatory annual IT security awareness training for all of our employees, which is closed by a registered examination. The training material is renewed every year, in line with any change in the regulatory environment in the meantime. The training material is planned to be renewed in 2023 in terms of concept and methodology. In addition to the general training role-specific trainings have INTEGRATED ANNUAL REPORT 2022 130 OTP BANK BUSINESS REPORT 2022 (CONSOLIDATED) also been organised – these are also closed with exams. 2022 was the first year in which we organised our International Rotation Programme, which we plan organise once every year from now. This is a three -day professional programme for the IT security managers and staff members of the foreign subsidiary banks where we presented the parent bank's expectations and plans as well. Attention to data phishing risks was drawn again in an article published on the intranet. The article was read by far more than the average readership: it was clicked on more than 1300 times. The attention of the branch employees is drawn to the modes of perpetration and the tasks to be carried out after receipt of notification from customers, on the Electronic Bank Security Portal as well. This was the third year in a row when we organised a data phishing campaign for all employees of the Bank, assessing employees' responses to data phishing emails and the connection of third party devices (USB sticks) found in the office. The results of the campaign are integrated in our security awareness activity and training materials and management information documentation is also produced on the basis of the results. A data phishing campaign of multiple events is planned to be worked out in 2023. A group level data phishing campaign is also planned to be conducted. The subsidiary banks also make efforts to raise security awareness among their employees. Each foreign subsidiary bank provides regular in-house IT security awareness training, which must be completed by new hires as well on a mandatory basis within a given time frame, in addition to the regular annual training courses. The training materials are reviewed at least once a year at most of the subsidiary banks. HR The Croatian subsidiary regularly organises awareness raising cyber security trainings for its employees using the systems. SI The Slovenian subsidiary delivers e-learning courses on system security twice a year for every single employee. New hires are also provided with training on this subject. The bank organises two phishing awareness raising trainings per year. The management of the bank was provided with a separate training course on IT security in 2022. Employees are regularly informed about special IT security occurrences and incidents and are provided with targeted trainings as well. ME The Montenegrin subsidiary delivered home office cyber security training and organised social engineering simulation for its employees in 2022. The latter was concluded with an outstanding result: in more than 98 percent of the cases no data leak occurred. 4.5. Prevention of money laundering ST11: 3-3 As a responsible financial service provider we spare no effort to make sure that the Banking Group is not used for money laundering. The legal regulations and the supervisory requirements regarding the fight against money laundering changed substantially in 2022 as well; compliance with the rules is a priority for the OTP Group. Money laundering is when attempts are made to conceal or cover up the origins of money originating from crime. Perpetrators or other persons may typically try to use services of financial institutions to produce proof of the legitimate origin of the money. One of the main objectives of the anti-money laundering function is to ensure concerted action at a group level. To identify, assess and manage risks relating to money laundering in 2022 we reviewed the AML risk assessment practices at the level of both the Bank and the Group. Risk management actions were prescribed and executed regarding the risks so identified. The Group AML policy was reviewed, inter alia. In accordance with the relevant AML regulations one of the main obligations of the Banking Group is to execute adequately in-depth customer due diligence actions. Its aim is to get to know the customer and the business relationship from the aspect of risks, and to identify transactions that do not fit in with the customer profile so constructed and that are thus suspicious from the aspect of money laundering. In the customer due diligence process we ask our customers for data to establish the identity and intents of the persons using the bank's services and the backgrounds of the various transactions. In accordance with the applicable statutory requirements we do not execute orders for customers who do not provide proof of their identity. The rules of customer due diligence were modified at the level of the Bank and the Group in 2022, identifying the risk factors that are to be taken into account on a mandatory basis. Moreover, in order to improve the effectiveness of the monitoring of customers' transactions and activities we reviewed/revised the instructions and procedural rules governing our monitoring activity. To make the performance of its tasks more effective the AML division reorganised its functions. In addition to legal compliance we continuously monitor the latest trends in money laundering as well as the modes of perpetration; we also introduce risk management actions to prevent money laundering. INTEGRATED ANNUAL REPORT 2022 131 OTP BANK BUSINESS REPORT 2022 (CONSOLIDATED) GRI 2-13 The AML division reports to management every quarter on the risks it has identified and the associated risk mitigating actions and developments, summing up the results accomplished and the actions taken during the period concerned. In 2022 we repeatedly reviewed and revised the AML training material aligned to the respective jobs and positions of our employees. The AML division regularly delivers training for the new hires of the branches and provides in-person training for branches frequented by risky customers. Employee who have completed the training act with increased awareness, identify risky customers and identify transactions that are suspicious of money laundering more easily. The foreign subsidiary banks also deliver mandatory trainings on the subject for their employees at least once a year. In the context of the fight against money laundering OTP Bank is continuously cooperating with the competent domestic and international authorities and interest organisations. In the context of such cooperation arrangements we also share best practices whereby all participants can improve the effectiveness of their actions against money laundering. OTP Bank and the OTP Group filed 8 and 2763 criminal reports regarding money laundering, respectively, in 2022. Most criminal reports were filed by the Romanian, the Bulgarian and the Ukrainian subsidiaries (940, 768 and 547, respectively). Obligations regarding the filing of criminal reports vary significantly between the different countries, which largely explains the significant differences between the numbers of criminal report filed. 4.6. Tax payment GRI 207: 3-3, 207-1, 207-2 The OTP Group aims to achieve maximum compliance with the legal regulations on taxation; accordingly, it settles its tax liabilities in the amounts prescribed by those regulations together with all of its other tax-related obligations (e.g. data supply) in each country in which it performs activities or in which it comes under the local tax regulations for any other reason. Strict prohibition of tax evasion and of taking advantage of loopholes in the law in ways contrary to the purposes of those laws, is a key element of its corporate culture. In Hungary we even contribute to the stability of public finances by bearing extra burdens (e.g. moratorium, banking tax, extra profit tax). The @Tax policy adopted by the OTP Group in 2022 applies to the entire OTP Group, every member of the group members' managing bodies and every employee of the Group, along with all natural and legal persons performing outsourced activities, expert or consultancy assignments or agency activities for the Group. GRI 207-3 The Tax Policy is based on, and is in line with the elements of, the Code of Ethics. Upon any impairment of the Tax Policy an ethics offence can be reported. The purpose of the introduction of the Tax Policy was to harmonise and standardise the tax payment practices. The Tax Policy is approved, and revised at least once a year, by OTP Bank's Board of Directors, paying particular attention to changes in the regulatory environment and tax authority's and courts' practices, in the guidelines issued by international organisations shaping international tax policies and in international practices. The head of the Accounting and Finances Directorate (chief accountant) is a top manager who is in charge of, and can be held accountable for, the taxation policy. The taxation division is independent of the business divisions. Owing to the complexity of the taxation rules and the constant change of judicial practice, taxation risks (e.g. tax deficit, fine) cannot be altogether precluded. Their management is regulated at the highest level by the Tax Policy. The Banking Group has no specific tax payment strategy. We always aim to ensure full legal compliance, to file tax returns in time, to fulfil our data supply obligatio ns and avoid being fined. These objectives appear in the individual targets set for the heads of the tax department as well. Taxation rules in Hungary changed particularly rapidly in 2022, posing challenges in the clarification of matters of interpretation by the time the new rules entered into force. GRI 207-3 In our cooperation with the tax authorities we aim at ensuring transparency, closing tax inspections as quickly as possible and providing information of adequate quality. Interests relating to taxation are asserted via the Banking Association. As regards the interpretation of the legal regulations we even communicate directly with the authority and regulatory bodies. INTEGRATED ANNUAL REPORT 2022 132 OTP BANK BUSINESS REPORT 2022 (CONSOLIDATED) 5. RESPONSIBLE EMPLOYER GRI 3-3 Impacts: International employment: Responsible employment promotes labour market adaptability and competitiveness, the sustainability efforts and the implementation of even socially responsible employer's behaviour. Employees are one of the Banking Group's most important stakeholder groups. As an employer, the Banking Group profoundly affects the livelihoods, living standards and the harmony between private life and work, for nearly 39,000 individuals and families. Decent employment can facilitate the welfare and development of the employees. Continuous training and development, a caring and family-friendly corporate culture promoting equal opportunities, and healthy work environment, equally play important roles in this. Impact on livelihoods and income levels: The provision of incomes – that are proportional to performance and sufficient for a decent living – has a fundamental impact on the quality of life of our employees and their families. Equality of opportunities for employees: A diverse corporate culture may contribute to the Banking Group's economic performance; it promotes its innovation capabilities and facilitates better understanding of the requirements and expectations of its environment. It encourages women to take up jobs. Objectives Decent employment Enhancement of employee satisfaction and engagement Retaining talented employees in the long run, career opportunities Fair income Ensuring work-life balance Motivating, and community, atmosphere at work Mental health improvement and well-being Accomplishment of equal opportunity and diversity Acts Decent pay and a performance-based benefits system Flexible employment Strengthening of a non-discriminatory, inclusive attitude by sensitisation programmes and training Ensuring equal opportunities for the sexes, providing equal opportunities in training and development Feedback development through open two-way communication methodology and development of its toolkit Engagement measurement, and development of, and follow-up on, pulse check action plans Introduction of new management role model, skill development Health insurance services, screening programmes, sports and recreational possibilities Stakeholder engagement/compliance: employee feedback, engagement, performance evaluation, interest organisations, cooperation with higher education institutions and service provider partners, compliance with requirements of supervisory bodies and authorities, disclosure the objectives of the ESG Strategy. Further basic principles and comprehensive goals relating to employees are to be found on our @website . INTEGRATED ANNUAL REPORT 2022 133 OTP BANK BUSINESS REPORT 2022 (CONSOLIDATED) 5.1. Employment The Banking Group faced a number of new challenges in 2022; this is partly because responsible employment continued to play a particularly important role in the life of the organisation. Comprehensive programmes and effective change management were key in achieving equilibrium, with a focus on employees. GRI 2-7 At end-2022 a total of 38,775 employees worked for the OTP Group48. The change in the Banking Group's headcount was a result primarily of the decrease in the headcount of the Russian and the Ukrainian subsidiary (-18.9% and -19.6%, respectively) which was partly balanced by the increase in the number of employees in Hungary (+6%); on the whole, the number of employees decreased by 4 percent at the end of 2022, year-on-year. The reason for the decrease in the headcount of OTP Bank Russia is a significant decrease in the role of the physical POS and the branch, as a channel, as a consequence of digitalisation. The number of employees of OTP Bank Ukraine decreased as a consequence of the war that broke out in February 2022. Branches were closed or their operation suspended for reasons of safety and security, and some employees asked to be relieved from duty for safety or family related considerations. As a consequence of the discontinuation of the use of retail products and a decrease in turnover some employees were made redundant. Of the Hungarian group the headcount of OTP Bank increased by nearly 4 percent in 2022 and the process of insourcing of outsourced activities continued. GRI 2-7, 207-4, 401-1 GRI 2-7 Employee headcount (as at 31 December) time Full employees Part-time employees Employees, total Women/men ratio Proportion of those employed under fixed term contracts Number of those employed under fixed term contracts Number of those employed under indefinite-term contracts 2018 2019* OTP Bank 2020 2021 2022 Total Men Women Total Men Women Total Men Women Total Men Women Total Men Women 7,848 2,541 5,307 8,396 2,887 5,509 8,872 3,328 5,544 9,228 3,487 5,741 9,654 3,678 5,976 877 76 801 922 834 88 954 74 880 850 60 790 862 70 792 8,725 2,617 6,108 9,318 2,975 6,343 9,826 3,402 6,424 10,078 3,547 6,531 10,516 3,748 6,768 30% 70% 32% 68% 35% 65% 35% 65% 36% 64% 8% 6% 8% 6% 4% 7% 4% 2% 5% 5% 3% 6% 4% 2% 6% 656 156 500 562 119 443 419 83 336 491 115 376 460 88 372 8,069 2,461 5,608 8,756 2,856 5,900 9,407 3,319 6,088 9,587 3,432 6,155 10,056 3,660 6,396 The data are accurate and derive from our internal records. 48 Active employee, person. Some of the employees – 2834 persons at end-2022 – work as agents in Russia and Ukraine. No employees are working in the Group in regimes without guaranteed working hours. INTEGRATED ANNUAL REPORT 2022 134 OTP BANK BUSINESS REPORT 2022 (CONSOLIDATED) OTP Group 2020 2021** 2022*** Total Men Women Total Men Women Total Men Women Total Men Women 26,407 36,364 10,078 26,286 38,504 11,524 26,980 36,458 11,547 24,911 194 1,257 1,811 339 1,472 2,317 433 1,884 27,653 37,815 10,272 27,543 40,315 11,863 28,452 38,775 11,980 26,795 27% 73% 100% 29% 71% 100% 31% 69% 4% 7% 6% 4% 7% 4% 2% 5% 392 1,891 2,338 426 1,912 1,646 272 1,374 9,880 25,652 37,977 11,437 26,540 37,129 11,708 25,421 6% 235 201 75% 25% 74% 26% 1,340 9,620 9,855 1,481 1,246 1,451 1,139 100% 100% 100% 2018 those 37,508 36,027 25,262 26,401 2019* 33,912 8,650 35,252 8,851 Total Men Women GRI 2-7 Employee headcount (as at 31 December) time Full employees Part-time employees Employees, total of Ratio women/men @Annex Proportion of employed under fixed term contracts @Annex Number of those employed under fixed term contracts Number of those employed under indefinite- term contracts * Not including the figures of Expressbank and OTP banka Srbija a.d. Beograd ** Full consolidated group. *** Including the entire consolidated group, without the figures of Alpha Bank The data are accurate and derive from our internal records. 24,728 35,532 34,875 25,476 33,120 1,673 2,283 2,177 2,633 2,132 9,399 8,392 456 459 6% 7% 5% 5% 6% 8% GRI 2-8 Workers not employed, person, 31.12.2022 OTP Bank OTP Group Temporary agency workers 157 3,589* Other external workforce Independent workforce in legal terms include for the most part IT experts (developers, operators), trainers and other special ists performing other services *The figure is based partly on estimates 88 1,090* GRI 205-2 A considerable number of sales agents (19,020 persons) are cooperating with the OTP Group in Hungary and in the region alike. Their number decreased on the whole in 2022 at the Bulgarian, Russian and Serbian members and the parent bank owing to termination of the engagement as a consequence of inactivity or expiry of contracts. Number of new recruits and fluctuation GRI 2-7, 401-1 In spite of the unfavourable macroeconomic processes, the challenging international environment and the companies' internal transformations fluctuation 49 diminished somewhat across the Group. The greatest increases in fluctuation were recorded in Russia, Croatia, Moldova and Montenegro. 49 The statistics include termination of employment both by employee and employer, as well as retirement. Since turnover is traditionally high among the sales agents of the Russian and Ukrainian subsidiaries, we also present their ratios without sales agents. INTEGRATED ANNUAL REPORT 2022 135 OTP BANK BUSINESS REPORT 2022 (CONSOLIDATED) Employee statistics GRI 401: 3-3, 401-1, @Annex50 50 The companies having their registered offices in Malta are not indicated separately among the country data. No employee of the Banking Group work in other countries. INTEGRATED ANNUAL REPORT 2022 136 OTP BANK BUSINESS REPORT 2022 (CONSOLIDATED) GRI 405: 3-3, 405-1, 205-2 Equal opportunity and diversity at the workplace GRI 2-10, 405: 3-3 OTP Bank’s strategy for gender equality was adopted in 2021, in which the Bank established its strategic goals including ensuring equal opportunities for all employee groups, creating an open, inclusive and non-discriminatory workplace and supporting a diverse, cooperative and professionally high standard work culture. Many of the OTP Group's subsidiaries have guidelines and/or policies prohibiting discrimination at the workplace and promoting equality of opportunities. HR The Croatian subsidiary adopted a Diversity and Inclusion Policy in 2022. The implementation of the action plan gets under way in 2023 and will be publicly accessible on the company's website. ME The CKB Group has also prepared its diversity policy. RO OTP Bank Romania conducted comprehensive (internal and external) survey in 2022 with the aim of creating a strong organisational culture to attract and retain talented individuals. Nearly 11,000 persons participated in the survey, including the subsidiary bank's employees. A total of four values were identified on the basis of the results: people (OTPeople), autonomy, rapid business growth and diversity at the workplace. These fundamental cultural values are reflected by the # otpmindset concept worked out as a result of the survey – this is the complete employer brand philosophy. INTEGRATED ANNUAL REPORT 2022 137 OTP BANK BUSINESS REPORT 2022 (CONSOLIDATED) GRI 406: 3-3 To improve the sex ratio in the management positions OTP Bank undertook to increase the proportion of women providing that at least one woman will be appointed to both the Board of Directors and the Supervisory Board. Candidates are selected by the Nomination Committee in accordance with the requirements laid down in the Credit Institutions Act on the basis of fitness/suitability for the given position and the individual's broad managerial skills and expertise. Moreover, in its group level management succession practice the company prescribed an at least 25 percent ratio of women candidates. The strategic objectives are accomplished through additional concrete programmes such as gender-neutral remuneration policy and the strengthening of a non-discriminatory and inclusive attitude by management trainings and internal awareness raising campaigns. In 2022 the Bank coordinated such efforts at a group level. Further actions and practices: • The Bank launched a three-year programme to achieve conformity to the EU directive regarding the quota for women on boards. The directive prescribed that women should hold at least 40 % of non-executive director positions and at least 33 % of all director positions on boards of companies. • To enhance non-discrimination those involved in recruitment took part in labour law and sensitisation training. GRI 202-2 Proportion of women and members from the local community in senior management, 31.12.2022 Board of Directors Management* Company Proportion of locals** (%) 100 75 83 38 43 80 100 100 0 40 83 OTP Bank DSK Bank OTP Bank Croatia OTP Bank Serbia SKB Bank OTP Bank Romania OTP Bank Ukraine OTP Bank Russia CKB OTP Bank Albania OTP Bank Moldova * Management: In Hungary: the chairman of an enterprise elected by the management body in its managerial function and employe d by the enterprise, or the chief executive officer appointed to manage the enterprise and employed by the enterprise, as well as all deputies of that officer; abroad: the chief executive appointed to manage the enterprise, who is employed by the enterprise, as well as all deputies of that office r and the division heads. ** Citizen of the relevant country. Proportion of women (%) 0 24 0 17 44 40 40 0 29 17 17 Proportion of women (%) 9 25 0 0 57 40 40 20 0 0 17 Proportion of locals (%) 100 90 83 83 78 80 100 0 86 67 83 A total of 336 persons with disabilities were employed at the end of 2022. Of the OTP Group the DSK Group employs the largest number (150), and at the same time, the highest proportion, of people with disabilities. The greatest increase in the number of such employees occurred in 2022 at OTP Bank Croatia and OTP Bank Russia (by about 30 at each). At OTP Bank employees with disabilities are provided by a monthly amount of HUF 10,000 in the way of rehabilitation allowance in addition to the extra holiday stipulated in the Labour Code. The OTP Group is committed to supporting career starters and, in connection with this, to cooperation with higher education institutions and students. Several Group members regularly host trainees and students completing their practical training, and employ students temporarily. The OTP Group employed 910 students in 2022, 37 percent more than in 2021. Of the group members the largest number of trainees were employed by the Romanian, the Albanian and the Ukrainian subsidiaries relative to their respective headcounts. OTP Bank has a dedicated Trainee Programme under which 593 young people acquired valuable experience in 2022. The aim is to increase the proportion of newly hired career starters recruited from among such trainees. In the context of cooperation with higher education institutions the Bank has traditionally sponsored presentations, research programmes and student competitions, and to facilitate long term cooperation it plans to launch a specific scholarship programme. Advocacy GRI 2-30, 402: 3-3, 402-1 All members of OTP Group respect the rights of freedom of association and collective bargaining. We provide advocacy opportunities by complying with the relevant local legal regulations. Employee interest advocacy is ensured by the trade union and the Works Council, with which we have a collaborative relationship. At OTP Bank year 2022 saw highly intensive cooperation in relation to the introduction of a new job system and the collective agreement in place. Most employees (6 2%) of the Banking Group are covered by collective bargaining agreements; the corresponding rate is 98% in the case of OTP Bank employees. There are collective agreements in force at OTP Bank, DSK Bank, OTP Bank Serbia, OTP Bank Croatia, OTP Bank Romania, OTP Bank Ukraine, the CKB Group and, as regards, Hungarian subsidiaries, at OTP Lakástakarék, OTP Jelzálogbank, NAGISZ and Velvin Ventures. As it INTEGRATED ANNUAL REPORT 2022 138 OTP BANK BUSINESS REPORT 2022 (CONSOLIDATED) relates to the minimum notice period regarding operational changes that could substantially affect employees, the banks of OTP Group follow varying practices in compliance with local requirements (see @Annex). The employees' rights, policies and the rules and practices of employment are transparent to the employees; they are accessible through the internal communication channels and the relevant intranet pages. Labour complaints GRI 401: 3-3 During the year a total of 71 labour procedures were commenced against companies of the OTP Group, of which 59 procedures were closed by the end of the year. Most (50) of the cases closed were labour lawsuits. Four proceedings were instituted against OTP Bank concerning unlawful termination of employment, of which the Bank won two cases by final and binding judgements, an agreement was reached in one case and one proceeding is pending. Most labour proceedings involved primarily the Serbian, Russian and Ukrainian subsidiaries. The Serbian subsidiary paid earnings lost as a consequence of unlawful termination of employment contracts in 17 cases in a total amount of HUF 167 million. The amount was significantly increased by lengthy compensation disputes. The Bulgarian Labour Inspectorate instituted 5 proceedings against DSK Bank, 4 of which were closed with acquittal and one with a minor fine. Three accident compensation proceedings were started ex officio in relation to accidents at work: in two cases the employer's responsibility could not be established while in one case the Bank issued a declaration admitting its responsibility. 35 of all labour proceedings closed in 2022 were closed with acquittal or non-financial sanctions, while in 22 cases monetary fines were paid in a total amount of HUF 172 million. 5.2. Employee engagement, satisfaction measurement GRI 2-29, 401: 3-3 Continuous dialogue with the employees is a key element of OTP Bank's human strategy – it communicates with internal stakeholders through a variety of channels and in diverse forms, to get to know their needs, requirements and opinions and receive feedback at the same time. OTP Bank conducted an employee engagement assessment in 10 countries applying the same methodology across the group, for the second time51. A total of 25,665 employees – 91 percent – provided feedback. The outstanding result was achieved primarily as a result of effective cooperation and an intensive communication campaign. The level of employee engagement (commitment) remained as high as 70% across the group in spite of the unfavourable economic environment; in other words, more than two thirds of the employees are highly committed to their workplace where pride, the "it is good to belong here" a nd "being part of the bank's success story" feeling continued to be the dominant values (with over 80% scores). 77 percent of the respondents think that they can make the most of their potentials and perform value - creating work here. The level of engagement was only 2 percentage points below the global financial sector average52. The OTP Group aims to increase engagement to global 75 percentile at a group level, which was at 78% in 2022. The levels measured in Hungary were among the best – engagement was, like in 2021, 76% again. A sense of pride (88%) continues to be one of the key strengths of the Bank. The ratio of those recommending the Bank improved over 2021 (to 74%). Employees took positive views of the managers supportive role and their career, development and studying opportunities. These values were outstanding even by international standards. Based on the results of the survey the OTP Group identified the international extension of the job system and the creation of transparent career paths as group level development priorities. At the parent bank on the other hand, even greater emphasis will be laid on open communication, cooperation among different divisions and enhancement of the reward culture. Every single employee was provided with standard information on the overall result of the survey, while more detailed division and team level results were presented to and discussed with the employees by their direct superiors. Action plans were worked out on the basis of the feedback in cooperation with the teams. BG DSK Bank launched its eNPS initiative: the internal processes and working relationships were analysed during the survey. Based on the results they prepared action plans for each evaluated area. Webinars were 51 It was conducted under a delayed schedule and different platform only in Russia, therefore its evaluation could not be completed by the end of 2022. 52 The Financials Avg benchmark contains six million responses from 116 companies of the world classified on the basis of the GICS method. INTEGRATED ANNUAL REPORT 2022 139 OTP BANK BUSINESS REPORT 2022 (CONSOLIDATED) organised in 2022 with the participation of those engaged in evaluation to enable them to share and discuss their opinions with the aim of improving cooperation. Recognitions/rewards The companies of the Banking Group received a variety of recognitions and rewards. In a survey conducted by the Zyntern.com job portal OTP Bank was found to be the second most attractive workplace overall, while on the industry chart in the economy category it retained its first position. With its Ideaportal in-house ideas competition OTP Bank Croatia won the PRCA Platinum Award for Employee Engagement for employee engagement. OTP Bank Moldova participated – with the involvement of its employees – in an employer brand survey as a result of which it won the Best Employer Brand 2021. OTP Bank Russia received "Silver" in the rating of the best employers in Russia according to Forbes. 5.3. Career opportunities 2022 saw the completion and introduction of the single job system at OTP Bank as a consequence of which the Bank concluded a new employment contract with every one of its employees. The new job system sets out the career paths offered by the Bank for its employees. Performance management and remuneration are linked to the wage brackets aligned to the career levels. The standardised system of criteri a resulted in a job structure which is a lot simpler, more transparent and flexible than the structure it replaced. The new system is transparent, the categorisation criteria of the job and career levels are publicly accessible, job maps are available in the new IT system supporting the job system where anyone can see the skills and competences required for holding a given job. The framework is extended to the whole of the Group in waves; it was introduced by the end of 2022 in the Hungarian group. The international group members will start applying it by the end of 2024. GRI 404: 3-3, 404-3 OTP Bank provides a career path overview twice a year to all employees as part of the performance review, defining the directions for personal growth and discussing development solutions. Of the subsidiary banks it will be fully implemented at the Serbian and the Moldavian subsidiary, while the other member companies will introduce it to various limited extents; accordingly some 44 percent of the Group's employees – men and women in more or less equal proportions, while in terms of position categories 57 percent of the middle managers and 43 percent of subordinate employees – are provided with career path overviews53. Talent programme We have developed a talent development framework and manager succession planning scheme based on a standardised group-wide approach. The international talent programme will be introduced in 2023. As part of the programme professional academies are being organised at various levels of knowledge. The Risk Academy was launched first, at managerial and subordinated employee levels. HR, SI Local talent programmes were operated in 2022 as well, the Croatian subsidiary is closing two talent fostering programmes while the Slovenian subsidiary introduced a dedicated scholarship system. Performance review GRI 404: 3-3, 404-3 Employee performance is assessed by the members of the OTP Group based on different methodologies. Regular feedback, linked to objectives and based on objective criteria, is fully implemented at OTP Bank and at several foreign subsidiary banks. Targets are set and evaluated with the help of the HR information system. Among the foreign subsidiary banks more than 95 percent of the employees of the Serbian, the Romanian, the Ukrainian, the Russian, the Albanian and the Moldavian subsidiaries are provided with performance evaluations54. There are no material differences between the sexes: 79 percent of the female and 76 percent of the male employees were provided with performance evaluations. In the OTP Group in terms of position categories 83 percent of the top managers, 93 percent of the middle managers and 75 percent of the subordinated employees are provided with performance evaluations. 53 OTP Bank Romania could not provide accurate data on the number of employees provided with career building overviews. Among top managers the career building overview is, in most cases, no longer relevant, therefore no specific data on this are presented. 54 No data are available at DSK Bank regarding subordinated employees who are provided with performance evaluations. INTEGRATED ANNUAL REPORT 2022 140 OTP BANK BUSINESS REPORT 2022 (CONSOLIDATED) 5.4. Remuneration, rewarding of the employees Benefits GRI 405, ST3: 3-3, 2-19, 2-20, 401-2 OTP Bank's Remuneration Policy is in line with SRD II – it covers the whole of the organisation and includes a description of the decision making process relating to determination, revision and implementation, including measures aimed at preventing or managing conflicts of interest, the role of the Remuneration Committee; managers' bonuses, the components of fixed and variable remuneration and the objectives for directors. The system of targets of foreign subsidiary managers were fully revised and the targets were harmonised, for 2023. Sustainability considerations were also taken into account in the process. In line with legislative requirements, the OTP Group consistently employs the principle of ‘equal pay for equal work’, including ensuring gender equality. Our group members typically provide the same benefits to full-time, part-time and fixed-contract employees55. Members of OTP Group remunerate their employees at the rates customary in the market of the relevant country. Some of our employees’ pay is dependent on their measurable performance. Every group member increased wages in 2022, by more than 5% in most cases. Nearly all members of the Banking Group offer fringe benefits to their employees. OTP Bank's remuneration practice differs from those generally applied by other market participants: in addition to the annual pay rising process enabling basic wages to be regularly adjusted, the average bonuses are also significantly higher than those generally paid in the m arket. OTP Bank's remuneration and incentive practice is closely related to the newly introduced job system. OTP Bank’s gender-neutral remuneration policy declares that job-specific wage brackets are aligned with the level of positions and market practices in its wage setting strategy; regular wage audits control and ensure that no significant wage differences can emerge between the genders. Consultations and coordination with the trade union also take place in relation to remunerations. OTP Bank has had an employee stock ownership plan for years; it is used as a long-term incentive tool. 20 percent more people than in 2021 – a total of 945 persons – participated in the programme in 2022. OTP Bank provided its employees with a one-off allowance in the third year in a row. The Bank paid a standing charge support for its employees – including those on sick leave and young mothers on maternity leave – in the way of an extra support in 2022. The foreign group members in whose countries the inflationary environment and energy price hikes made it necessary, also provided their employees with a one-off support. UA To respond to the crisis caused by the war conflict in Ukraine the OTP Group implemented an complex extraordinary support programme in which in addition to a supplementary financial support, and reimbursing home rental costs for the employees affected by the war (forced to move, mobilised) it helped employees move to safer locations and provided them with financial and material assistance, critical medicines etc. For more information on these actions and measures see the Bank's @website. GRI 405-2 Ratio of the basic salary of women to men, 31.12.2022 Men 100% OTP Bank 100% DSK Bank 100% OTP Bank Croatia 100% OTP Bank Serbia 100% SKB Bank 100% OTP Bank Romania 100% OTP Bank Ukraine 100% OTP Bank Russia 100% CKB 100% OTP Bank Albania 100% OTP Bank Moldova OTP Group* 100% * Average of the parent bank and the subsidiaries. Women Senior managers Middle managers 96.1% 84.4% 93.2% 84.0% 98.0% 88.9% 88.7% 75.3% 94.9% 100.0% 90.3% 89.1% not applicable 85.9% not applicable* 86.0% 97.4% 94.6% 103.1% not applicable 86.5% 77.8% 153.3% 96.5% Employees 98.8% 78.6% 96.8% 82.0% 98.5% 90.3% 95.8% 85.7% 97.2% 111.7% 92.7% 90.4% Average 98.6% 78.7% 96.5% 85.0% 98.4% 90.3% 95.5% 85.0% 96.7% 108.6% 92.6% 90.5% 55 The practice of OTP Bank Russia is an exception: part-time and fixed-contract employees are provided life insurance, health benefits, extra days off and other benefits only to the extent required by law. OTP Bank Albania does not provide the latter to part-time employees either, while OTP Bank Serbia does not provide health benefits. INTEGRATED ANNUAL REPORT 2022 141 OTP BANK BUSINESS REPORT 2022 (CONSOLIDATED) OTP Social Foundation In Hungary, the Foundation provides help to OTP Group employees, (including pensioner employees) and their families in crisis situations. One-off, long-term or in-kind assistance (including medical care or support by a psychologist) is granted based on applications. Besides crisis situations, the assistance may also be requested for camps or start-of-school expenses. 5.5. Training and education GRI 404: 3-3, 404-2 The Banking Group laid particular emphasis on management skill development in 2022 and continued to offer its employees a wide range of training programmes. In 2022 the OTP Group spent a total of HUF 3.2 billion on employee t raining. The average per capita cost nearly doubled, as a result of the price increases and the intensive trainings for middle and top managers. The average training time was 35 hours/employee. Every single employee of the OTP Group is provided with training. Most trainings were provided in 2022 by the parent bank where 80 percent of the employees participated in courses (not including the mandatory trainings). Leadership development One of the most important goals of OTP Bank's HR strategy is to support and develop its managers as they play a key role in maintaining the cohesion, and ensuring the effectiveness, of the organisational units and in change management. A general leadership development concept was introduced at the parent company's headquarters including regular forums, learning through experience, new tools, devices and methods. The Bank offers a targeted training portfolio for branch managers, geared to their specific challenges. The development of their problem solving skills is facilitated by a dedicated platform called EDUardo by simulating life-like situations, real-time feedback and interactive case studies. RS Our Serbian subsidiary continued its SEED programme for senior managers, the mentoring and reverse mentoring programme, the Innovation Academy and the Brick Breakers simulation, contributing to the improvement of change management. Professional training programmes and competence development Participation in the professional and other training courses necessary for work performance (e.g. ethics, compliance, security, health and safety, environmental protection) is based on annual training plans. Training plans are developed with the involvement of staff, taking into account the results of performance reviews. Development of the employees' professional expertise is one of the most important tasks at all group members. Strengthening communication skills, cooperation skills and personal productivity and supporting stress and change management, play a special role in trainings aimed at skills development. RO The Romanian subsidiary continued its training programme – supporting its agile organisational transformation – for the shared and support functions (including compliance, legal, financial, retail risk management). It organised a series of trainings for the business and IT divisions regarding the new agile working methods (change management, Lean Six Sigma Yellow Belt etc.) and provided its managers with a coaching programme. GRI 404: 3-3, 404-1 Annual training per employee, number of hours (2022) Senior manager Middle manager Employees Men Women 2022 average 2021 average 2020 average 2019 average 2018 average OTP Bank 51 103 76 73 84 80 76 74 80 80 OTP Group 54 59 33 36 35 35 47 50 50 47 INTEGRATED ANNUAL REPORT 2022 142 OTP BANK BUSINESS REPORT 2022 (CONSOLIDATED) 5.6. Safe and healthy working environment Work-life balance GRI 405: 3-3 The objective of the HR strategy focusing on employee experience is to create a supportive workplace atmosphere; to this end, the OTP Group applies a number of practices making it possible for employees to achieve the best possible work-life balance. Atypical forms of employment continued to evolve and grow at the members of the OTP Group in 2022, which also had a positive impact on employee satisfaction. The Banking Group enabled part-time employment, remote working and working from home office. An average of 25 percent of the employees working in OTP Bank's central areas worked from home office – to extents varying by division. The number of persons employed in remote working arrangements also increased, while hybrid forms of employment (partly in-office, partly home office) were commonly adopted across the Group as a whole. Such arrangements were most typically available – like before – primarily for those working in central positions. The ratio of work from home accounted for an average of 30% at a group level, varying by group member. BG In addition to remote work and hybrid work arrangements DSK Bank also applies the practice of shared work, typically in financial and telephone customer service jobs. HR When it introduced the "3+2 hybrid work model" (3 days in-office, 2 days home) OTP Bank Croatia prepared a guide for its employees on the management of the new circumstances, on how to achieve a balance between work and life at home as well as on effective and efficient work organisation. UA After the outbreak of the war in 2022 the Ukrainian subsidiary provided nearly all of its employees who were capable of working from home with laptops and then launched the pilot of its "Hot Desking" project. In that scheme the employees were enabled to plan their working weeks in the Deskbird application, booking workstations or opting for working from home. The test was a success therefore the subsidiary will extend this practice to all of its employees in 2023. Family-friendly programmes Family-friendly workplace OTP Bank was recognised in 2022 as a "Family-friendly workplace". This is to certify that the Bank considers the family as a value and in its operations it takes the family's needs and considerations into account, promoting the employees' interests with expedient measures and facilitates the achievement of a harmony between work and private life. According to the findings of an external audit the Bank applies outstanding practices in well-nigh all segments. Applicants and new hires find written information on family-friendly measures through multiple channels; they also appear in the company's internal regulations. OTP Bank provides its employees with a wide variety of benefits and allowances (health and pension fund contributions, health insurance) as well as organisational services (product and partner discounts), some of which may even be extended to family members. It also provides an extensive range of family support solutions (e.g. in connection with child births, burials of close relatives) and organises multiple company events (Family day, Santa Claus) to which family members are also invited. Moreover, the Bank pays particular attention to its employees' physical and mental health. In 2022 OTP Bank implemented a number of new projects and actions regarding the work-private life balance, such as the extension of the scheme of bonus vacations or the introduction of four-day long weekend vouchers. Supporting and developing its employees' welfare is important for the OTP Group therefore in 2022 the parent bank gathered within the international group the best practices promoting employee welfare with a focus on health preservation and community development. Across the group, thousands of employees are on long term parental leave 56. Parental leave is available to fathers as well, but few of them take this opportunity for the time being. 56 Parental leave is a long term leave for child care, which is, depending on local regulations, available for both women and men. We have been using the Hungarian translation of the GRI term "Parental leave" in reporting for years. The definition does not cover the short term parental leave introduced in Hungary in 2023. INTEGRATED ANNUAL REPORT 2022 143 OTP BANK BUSINESS REPORT 2022 (CONSOLIDATED) GRI 401-3 Employees taking parental leave and employees returning, 31.12.2022 Number of persons taking parental leave Number of persons returning to the company from parental leave after its expiry Employees returning to the company from parental leave after its expiry (%) * of those who returned in 2021. OTP Bank OTP Group Men 3 0 0 Women 937 245 80 Men 87 50 85 Women 4,117 810 52 Many of OTP Bank's employee have small children or are preparing to have children. A guide for expectant young mothers called "OTP Gyermekváró Kisokos" has been prepared to sum up the main tasks and some advice for women preparing to give birth. OTP Bank has for years been offering camping programmes for employees' children ad discount prices and applications for camping support can be submitted to the OTP Social Foundation. Moreover, employees my also submit applications for camping cost contributions to help cover the cost of external summer camping programmes. As many as 96 primary school children participated in the financial educational summer camps organised by the Fáy Foundation in 2022. Programming camps were also available for employees' children. Other members of the OTP Group also provide opportunities for their employees to submit applications for school start support. Similar allowances include contribution to nursery/preschool fee as an option in the Cafeteria scheme. HR To enrich its offering of training programmes OTP Bank Croatia introduced two new e-learning modules for all of its employees: "How to communicate with our children" and "Understanding emotions and emotional resistance". These modules have been developed in response to the growing uncertainty and concerns relating to the pandemic and the war. Stress management and individual support Employees exposed to permanent stress may develop, besides mental issued, some serious physical problems as well, such as cardiovascular diseases or musculoskeletal pain. The OTP Group lays particular emphasis on preventing and eliminating the problems inherent in the nature of its operations (e.g. stress, sitting at work). To mitigate psychosocial risks most member companies offer stress management training for their employees. OTP Bank conducted numerous surveys during the year, including the mapping of the employees' mental health. Psychosocial risks will be assessed in 2023. To help employees overcome mental difficulties OTP Bank provided services for individuals as well as for family members, in 2022 as well. The Smart Watch webinar series was continued at OTP Bank. Weekly presentations by external specialists discussing typically problems relating to mental health, personal development and various common situations at work or in private life, and recommending solutions. The Bank's employees had access to free consultations with qualified specialists at the @meghallgatunk.hu portal, in 2022 as well. The assistance provided by coaches, psychologists and mental hygiene specialists were used some 1700 times by employees in search for help in dealing with family or workplace related problems or health issues. According to feedback the service is useful; our employees are provided with relevant expert assistance. BG HR The Bulgarian subsidiary provides two extra days of paid holiday to for employee recreation and regeneration. OTP Bank Croatia has introduced a scheme of granting days off in exchange for extraordinary performance. Overwork is one of the main sources of stress therefore the Banking Group makes efforts to reduce this. No material change took place in the amount of extraordinary work in comparison to the preceding year. The per capita overtime at OTP Bank was approx. 25 hours as an average in 2022, the same as in 2021. Physical activity Welfare actions at the workplace or outside working hours also contributed considerably to stress release or reduction. The OTP Group encourage its employees to do physical exercise. The primary objective of OTP Bank's community sports application scheme is to encourage workplace communities – at least 10 strong teams – to engage in joint sports activities. With support under the scheme more than 105 events were organised, mobilising about 3,500 employees in 2022. BG DSK Bank's Wellness Academy focused on healthy life, physical exercise and medical consultations in 2022 as well. SI SKB Bank received the WAC (Active Workplace Certification) for its results achieved in 2022. Recreational sports and even competitive sports activities are available in various sports associations and clubs at the Bank. INTEGRATED ANNUAL REPORT 2022 144 OTP BANK BUSINESS REPORT 2022 (CONSOLIDATED) RO The Body Awareness Programme of OTP Bank Romania was established with a view to supporting sports, healthy eating and awareness; it contributed to the achievement of the objectives with a series of videos presenting sports exercises, mindfulness training and 3 sports camps. A wide variety sports facilities and arrangements were available among the member companies in 2022 as well: regional and national sports days were organised within the bank and we also participated in traditional sports competitions among banks. The sports associations activated the employees and their families, they organised in-house competitions and helped participants in their individual preparations. Recreation OTP Bank and OTP Bank Romania own several hotels, where rooms are available for employees at reduced rates, or for those who have delivered outstanding performance, free of charge. Besides the employees of OTP Bank and OTP Bank Romania, some of the domestic subsidiaries and the Moldavian subsidiary have access to holiday resorts; in 2022 some 2,500 employees took this opportunity. Healthcare services The quality of life is heavily affected by health issues – whether of physical or mental origin – and neglecting them might lead to even more serious consequences. Several members of the OTP Group provide their employees with healthcare services over and above what is required by law, including health insurance and screening tests, in view of employee needs and requirements, and given the high proportion of female employees, laying particular emphasis on screening tests that are especially important for women. GRI 2-29 OTP Bank conducted a survey on health services in 2022 among its employees who had used such services during the preceding six month period. The questionnaire was filled out by 900 employees and the results reflected an extremely high – 98 percent – rate of satisfaction. The highly rated areas included for instance the occupational health services and health insurance provision; the organisation of service provision was noted in particular as an area in need of improvement. Under the health insurance contract the in 2022 the Bank financed nearly 19 thousand screening tests and the use of 14 thousand health care services stemming from post-covid and other health issues. Occupational health and safety GRI 3-3 The OTP Group does its utmost to maintain a safe working environment; the low number and low severity of accidents reflect the success of its efforts. The Banking Group's employees work for the most part in low risk jobs in terms of health and safety; they are provided with training on occupational health and safety as well, in accordance with the relevant local regulations. The employees of OTP Bank participate in training every year – even beyond the requirements – which in 2022 they already completed on the basis of the renewed occupational and fire safety e-learning material. The most important tasks in terms of occupational health and safety comprised in 2022 the completion of the comprehensive fire and security tasks relating to building M12, the creation of the requisites and conditions for the safe and reliable operation of the printing facility put in place in the new premises and the provision of in-person first aid training. Accidents GRI 403: 3-3, 403-9 At OTP Bank, the rate of work-related injuries dropped to57 0.7, which is a good result compared to the national statistical average (4.4 to 5 accidents at work per 1,000 employees). For OTP Group as a whole, the indicator increased slightly, to 2.0. It is an important achievement at OTP Bank that still no accident occurred while employees worked from home, just as there were no accidents involving supervised employees or persons working on company premises either in 2022 58. Accidents were investigated in accordance with the relevant legislation. External workers working at OTP Bank's premises are provided, and familiarise themselves, with the occupational health and safety regulation upon the handover of the worksite and they are obliged to report any accident occurring at the premises. At Group level, work-related injuries typically occurred while walking to the workplace (falling, slipping) or – as in the case of OTP Bank Croatia and OTP Bank Serbia – in road accidents. 57 Number of work-related injuries per 1,000 employees 58 Of the foreign subsidiaries, DSK Bank, OTP Bank Romania, OTP Bank Ukraine and OTP Bank Russia were unable to supply data INTEGRATED ANNUAL REPORT 2022 145 OTP BANK BUSINESS REPORT 2022 (CONSOLIDATED) UA Within the OTP Group this was the first time a fatal accident occurred since the first sustainability report was filed, in spite of the precautionary actions one bank employee lost his life in rocket attack 59. In connection with the war conflict OTP Bank Ukraine identified the critical tasks in preparation for air raids and air raid alerts, including immediately stopping work and moving employees to shelters during air raids. GRI 403-9 Work-related injuries 2020 22 OTP Bank 2021 18 2022 9 2020* 42 OTP Group 2021 77 2022 85 Number of accidents** Rate of work-related injuries** (per 1 million hours worked) Number of high-consequence injuries Rate of high-consequence injuries (per 1 million hours worked) *OTP Bank Ukraine was unable to provide data and is therefore excluded from the basis figures as well. ** Reportable accidents The data supply covers all employees. The total number of hours worked was 67.124.133 at the OTP Group and 17.964.752 at OTP Bank in 2022. 0.02 0.63 0.09 1.27 1.05 1.11 0.01 1.35 0.50 6 1 0 0 1 0 - - - 59 Deaths per 1 million working hours for the OTP Group: 0.01. INTEGRATED ANNUAL REPORT 2022 146 OTP BANK BUSINESS REPORT 2022 (CONSOLIDATED) 6. CITIZENSHIP GRI 3-3 Impacts: Strengthening of financial awareness in vulnerable groups Sharing financial knowledge and raising financial awareness improves responsible decision making, financial planning and the understanding of financial products among retail customers on the one hand, and reduces their exposure on the other hand. This is important for everybody but it is particularly crucial for young people and disadvantaged people. Citizenship: The Group uses part of its profits for sponsoring projects and civil society organisations – facilitating the achievement of overall social objectives, encouraging community building and the fight against social inequalities, and promoting equal opportunities in general. Even greater impact might be achieved by spreading donation activities and micro-donations, as widely as possible. Objectives: Raising awareness of the future among people Developing financial literacy, attitude-shaping Sponsoring culture and arts – creating and preserving values; Promoting the accomplishment of community goals, standing for values Strengthening community involvement through voluntary programmes, community building Development of the culture of donation in society Acts: Operation of excellent, widely accessible financial educational programmes Collaboration with civil society organisations and professional organisations in important social causes Consistent support/sponsorship policy, measurable results Encouraging micro-donation by research, product development, media presence and supplementary funding Boosting the power of small communities by promoting volunteering Sponsoring sports as a community building activity Stakeholder engagement/compliance: extensive cooperation with civil society organisations, professional organisations and local communities, surveys, involvement of employees and customers, asking for feedback on results and experience, media, ESG strategic objective disclosure For further information visit our @website. 6.1. Activities aimed at improving financial literacy ST12: 3-3 The OTP Group has, for years, been a dedicated supporter of the development of financial literacy in the whole of the region. The member companies participate in this activity in various ways and to various extents to make sure that today's young people make adequate financial decisions tomorrow as conscious adults. OTP Bank has been conducting surveys for ten years now to explore the Hungarian population's self - provision habits and behaviour and their responses to various economic situations, on a sample of 1,500 18-70 years old bank account holders. The main average of the OTP Self-provision rose from 34 to 37 points in 2022, the greatest positive change within a year in the history of the surveys. Another important result was an increase in the proportion of people having savings. The survey found that the majority of people consider it important to have savings. 95 percent of the respondents also reported of increases in their expenditures and 76% characterised this increase as "significant". The survey found that most people respond to the economic uncertainty consciously, by cutting their consumption and by increasing their savings to the extent possible, and by working out financial plans. Respondents who prepare financial plans for at least the next month formed the majority again for the first time since 2020. INTEGRATED ANNUAL REPORT 2022 147 OTP BANK BUSINESS REPORT 2022 (CONSOLIDATED) OTP Fáy András Foundation The OTP Fáy András Foundation celebrated the 30th anniversary of its establishment in 2022 – it is primarily through the foundation that OTP Bank performs its activities promoting financial literacy in Hungary. The foundation's mission is to raise awareness of the future among people. To this end, in addition to strengthening financial awareness and knowledge of economic matters it also provides trainings on subjects such as career planning and vocational orientation, conscious media use as well as sustainability. Besides free of charge, practice oriented, experience-based in-person and digital training programmes for primary and secondary school students and young adults, communication aimed at disseminating knowledge and raising awareness among the general public will continue to be a major element of the foundation's activities. The number of people participating in in-person and digital training increased considerably in 2022 in comparison to the preceding year. On the one hand, in-person training had only to be suspended for a short period owing to the Covid-19 epidemic, and on the other hand the foundation developed and transformed training organisation and the digital portfolio. Some 66 percent of the participants took digital courses in 2022. In-person training Digital Total Digital Total trainings FN-CB-240a.4 The number of participants of training programmes in 2022 Training programmes for young people (No. of persons) Participants of 25 different courses of which disadvantaged participants those taking 36 different stream materials of which disadvantaged participants those taking 39 different 45-minute e-learning materials Adult training programmes (No. of persons) those taking 2 types of multiple-hour e- learning materials 10,001 224 8,315 ~500 9,703 28,019 1,288 29,307 The training portfolio and the training materials are continuously updated, enhanced and optimised by the foundation's specialists in terms of content and methodology, as well as innovative technological solutions. Two thirds of the training portfolio – currently of more than 100 training materials – has already been digitised. The number of live interactive stream trainings and that of youth and adult e-learning materials each increased considerably in 2022. Besides conveying knowledge, the playful exercises comprised in the trainings contribute to the development of social competences as well, which are also required for success in life. To improve soft competences and critical thinking the foundation developed – as part of the adult training portfolio – a new training material entitled "Financial awareness, career planning – decisions and consequences"; its testing is currently under way. Also in the pilot phase is a complex training programme entitled "Modern entrepreneurial existence", also produced for young people, on the subject of founding and operating businesses. The Basic Financial Literacy Programme is also aimed at young adults. This is the first training programme prepared for them by the foundation. The testing of the programme was successfully closed in February 2022 – several universities have already integrated it in their syllabuses and testing of individual enrolment has also been started. In addition to the number of participants of training courses the number of educational institutions partnering with the foundation also increased in 2022. The model and partner school network was created on the basis of a new concept with the aim of having institutions open to cooperation even beyond trainings. Expansion of the university and vocational training partner network is also an objective in adult training – whose primary target group is young adults – together with making the Basic Financial Literacy Programme accessible for as many students as possible. The list of partner higher education institutions also increased: the foundation is cooperating with Eötvös Loránd University, the Hungarian University of Agriculture and Life Sciences, the Budapest Business School, the Budapest Corvinus University, the Pannon University and the University of Nyíregyháza. The teacher further training programme organised in cooperation with Eötvös Loránd University of Sciences continued in 2022, as – besides students and young adults – teachers continue to be an important training target group for the foundation. The training of trainers working with a methodology worked out with the involvement of the foundation was closed in 2022 at our Moldavian twin foundation. INTEGRATED ANNUAL REPORT 2022 148 OTP BANK BUSINESS REPORT 2022 (CONSOLIDATED) The Fáy Forum was launched in 2022. In on-line lectures transmitted live twice during the year experts discussed topical matters of relevance to education expected to be of interest to a wide audience. Nearly a thousand teachers and parents registered for the two events. Besides the education and training programmes the foundations communication programme aimed at disseminating knowledge and raising awareness is designed for the general public. This involves an on-line campaign and an influencer campaign promoting financial awareness on subjects including starting businesses, data security, home renovation and donation. The OK Roadshow was staged in 2022 with grant funding in four counties in Central Hungary. 16 financial terms were processed in the context of the programme with the help of playful quizzes and exercises, in 7 towns at 16 primary school and 6 family events. The series of events was supplemented by a financial essay writing competition and an on-line financial contest. Thanks to the series of 17 30-minute short films covering the events and the competition, broadcast through regional television channels and the radio and television communication campaign covering the roadshow the financial awareness raising programme reached an even wider audience. In the framework of the INTERREG Digital and Interactive Financial Literacy Tales project, implemented with EU funding the OTP Fáy András Foundation and the Constantine the Philosopher University Nyitra produced a programme developing financial literacy with the help of fairy-tale- and drama pedagogy instruments. The 3 Slovakian and 3 Hungarian tale adaptations supplemented with financial and economic educational content – of the foundation's and the university's own development – were presented at 21 Hungarian and Slovakian towns and villages to a total of 2,380 students by the professionals of t he foundation and the university in the form of in-person trainings and on-line stream presentations and at camps and other events. The events, with on-line and print media appearances and radio interviews, reached a wide audience. News of the project and the foundation's message emphasising the importance of financial awareness reached more than 300,000 followers through the posts of the influencer who participated in the opening event. As part of a series of events organised to mark the 30th anniversary of its opening the foundation organised a future awareness and vocational orientation weekend. The purpose of the day-and-a-half programme was, besides awareness raising on sustainability, futurology and future planning, to help secondary school students just before making career choices and starting studies in higher education, and graduates about to enter the job market, in career planning. In their professional work the OK Educational Centres in Romania and Moldova relied on methodologies that have proven to be effective in Hungary. RO The Romanian subsidiary's key corporate social responsibility project is called OTP Bank Romania Foundation. As well as financial education of young people and adults the foundation delivered programmes on subjects such as digital education, emotional intelligence and vocational orientation for generation Z. The Financial Fitness training was attended by adults, while 180 secondary school students were pro vided with training under a new educational programme launched together with the municipality of Csíkszereda (Miercurea Ciuc). The foundation tested a long term – 3.5 month – consultation programme with the participation of 17 students. 750 persons attended the training programmes of the OK Centre. In some cases the foundation participated in the development of training materials in cooperation with other organisations. MD During the two and a half years of its operation the Moldavian OK Foundation developed into a local reference centre in financial education. The foundation's programmes and initiatives reached more than 5 thousand people in 2022. Such programmes included, for instance, participation in the Money Week initiative, five summer camps for children and the StartUpOK training programme for entrepreneurs of the future. They provided a financial management training programme for teachers with support from UN Women, in cooperation with the National Centre for Continuous Training and Leadership, and for businesswomen, with EBRD support. Collaboration in financial education We actively supported the Money Week initiative of the Hungarian Banking Association and the Money Compass Foundation in 2022 as well: 57 volunteers from OTP Bank were received by the schools participating in the programme, who helped draw attention to the importance of financial awareness. The initiative is part of the Global Money Week and the European Money Week, which have been joined by several foreign subsidiaries of OTP Bank. HR RS AL The Croatian subsidiary organised a workshop in cooperation with a primary school in Zadar, while the Serbian subsidiary organised an on-line workshop in collaboration with multiple student INTEGRATED ANNUAL REPORT 2022 149 OTP BANK BUSINESS REPORT 2022 (CONSOLIDATED) organisations. Employees of the Albanian subsidiary delivered training free of charge in cooperation with the Albanian Banking Association. UA The Ukrainian subsidiary, in cooperation with the Ukrainian National Bank, worked on developing the population's financial literacy in a joint awareness raising programme "financial protection". BG A representative of the subsidiary DSK-Rodina participated in the training programme "Non-bank financial sector in Bulgaria" organised by the Financial Supervision in cooperation with other state bodies and civil society organisations to provide vocational school students with an insight in the operat ion of the financial sector. AL The Albanian subsidiary organised a study tour to Budapest for economic journalists to enhance their knowledge so that as accurate, objective and transparent information as possible is conveyed to the participants of the Albanian economy and the Albanian public. FN-CB-240a.4 Information on the development of financial literacy, OTP Group, 2022 Number of participants in the company's own and the OK educational programmes Number of participants in trainings implemented in cooperation with other organisations Donations used for the development of financial literacy Sponsorship used for the development of financial literacy 34,184 persons 2,616 persons HUF 958 million HUF 152 million Financial education of socially disadvantaged groups One of the most important objectives of the OTP Fáy András Foundation was to promote the financial inclusion of socially disadvantaged people. The foundation reaches this target group with its existing trainings but it plans to develop a special targeted individual training programme. Research to explore the methodology, the study material and effective forms of training was launched in late 2022. In addition to the above, the foundation cooperated with a number of partner organisations and delivered trainings of special, personalised content elements for disadvantaged students and young people with the aim of raising financial awareness and transferring knowledge: • The foundation also participated, with its training entitled "Financial awareness for independent life" in a programme of one of Hungary's largest specialised child care service provider network called Szent Ágota Child Protection Service (caring for more than 7,000 young people removed from their families), and the ÁGOTA Foundation, relating to aftercare and home making. The practice oriented training, based on experiential education methods, was developed for young people about to start their own lives and for young adults receiving aftercare services Its objective was financial awareness raising and provision of assistance in making conscious decisions concerning the utilisation of financial resources to which young people gain access once they become of age. • The foundation organised several financial education camps and programmes for mentorees of the Csányi Foundation. In the playful financial training programme implemented at two venues in the framework of Parents Academy, in addition to the students of the Csányi Foundation their parents also participated in the awareness raising training encouraging conscious management of one's finances. OTP Bank participated in the Programme Office for the Dissemination of Network Knowledge (HTTP) Foundation’s "It could be Easier" programme for helping the unemployed in 2022 as well. The purpose of the Foundation is the broadest possible dissemination of marketable IT skills. Together with its partners it provides on-line training free of charge on the lehetkonnyebb.hu website primarily for people less experienced in the digital world. The subjects dealt with during the training (upon the completion of which recipients receive diplomas) include on-line job-seeking, transition to on-line work and conscious management of one's finances, etc. The study material can be acquired in a specific time frame by studying alone or in groups, with expert assistance may at request. As many as 744 persons registered on the platform in 2022, of whom 207 participants received certificates in proof of their successful completion of the training. RO OTP Bank Romania is operating a mentor and scholarship programme "GirlPower" for career starter women. The two finalists selected from 47 applicants received university scholarships worth more than a total of HUF 2.3 million. Moreover, OTP Bank managers participated in their mentoring. MD The Moldavian OK Foundation provided financial education for refugees as well, with the involvement of INTERSOS and UN Women. INTEGRATED ANNUAL REPORT 2022 150 OTP BANK BUSINESS REPORT 2022 (CONSOLIDATED) 6.2. Citizenship The OTP Group is an active participant of local communities. A dominant market share in multiple countries entails responsibility as well: the resulting tasks include reduction of social inequalities, contribution to creating opportunities and giving answers to current local and regional challenges. The supports provided by OTP Bank have for years been steadily focused – besides the development of financial literacy – on helping disadvantaged people and people in need and sponsoring culture and arts – creation and preservation of value, as well as sports. The OTP Bank subsidiaries make, for the most part, their own decisions on which local causes and initiatives they support or sponsor and how they engage their stakeholders. Measurability is, however an imp ortant principle in the case of the projects. Another one is that the Banking Group cooperates essentially with organisations and not individuals in this way. In 2022 OTP Bank started a process of pre-qualification of the sponsored and supported organisations, according to the same criteria it applies in the pre-qualification of suppliers. OTP Bank typically supports long-established social and regional cultural projects and participates in long term cooperation arrangements, overarching decades in cases (as in the case of for instance the International Child Rescue Service or the Hungarian Charity Service of the Order of Malta) which facilitate impacts and predictability. OTP Bank's corporate social responsibility activities focused in 2022 on two specific fields that are outstanding besides activities pursued so far and which overarch country borders: provision of humanitarian assistance necessitated by the war in Ukraine and enhancing the micro-donation culture. These are described below in more detail. The link between the two areas is created by the donation platform launched by OTP Bank in 2021 – through which people offered donations worth a total of HUF 250 for people in need, in 2022. Assistance in relation to the war in Ukraine OTP Bank's micro-donation programme promptly responded to the critical situation and shortly after the outbreak of the war it made it possible to support the Hungarian Charity Service of the Order of Malta's efforts aimed at helping Ukrainian refugees. The Bank launched a campaign to promote the initiative among its customers and the Ukrainian subsidiary's HR staff worked as coordinators in that extraordinary situation. The organisation provided assistance in Ukraine for those remaining in their homes and refugees arriving there, it received families arriving in Hungary in need of assistance and provided them with accommodation and at the same time it paid particular attention to the most vulnerable groups, families with three or more children, refugees arriving with sick, elderly or disabled persons, and families left without family heads. A total amount of HUF 125 million was collected for the organisation during the campaign. Moreover, OTP Bank donated HUF 100 million to support the cross-border activities of one of Hungary's largest charity organisations, the Ecumenical Aid Organisation. As an international banking group it found it only natural that it provides assistance for colleagues in difficulties as a consequence of the war, and their families. The Bank provided them with free accommodation and full board in its own hotels. Psychologists helped refugees deal with traumas to help them maintain their mental health. Volunteer colleagues organised student activities, and handicrafts activities in makeshift play areas. OTP Életjáradék offered nearly 40 apartments for accommodation on a longer term, renovated and furnished by volunteers of the Hungarian members of the Banking Group and OTP Fáy András Foundation. The home renovation campaign "Adopt a Ukrainian family" was promoted by INTEGRATED ANNUAL REPORT 2022 151 OTP BANK BUSINESS REPORT 2022 (CONSOLIDATED) the Bank on its internal communication portals and surfaces. The necessary number of participants – and many more – registered in a matter of hours. Instead of the originally expected 30 teams as many as 50 teams – 700 employees – undertook to carry out tasks in the voluntary project. In the collection of donations – advertised among employees – a total amount of HUF 15 million was received from 650 donors, which was used by the Humanity Social Foundation60 for purchasing medicines, food and clothes. BG Donations worth HUF 10 million were collected by DSK Bank's employees to help colleagues in trouble as a consequence of the war. In its internal communication the Bank continuously provided information on the current statuses of the initiatives aimed at helping Ukrainian colleagues, including the progress achieved in the collection of donations, thereby encouraging the provision of assistance. AL The Albanian subsidiary provided direct contribution to the costs of accommodation of Ukrainian refugees at a hotel. UA The Ukrainian subsidiary was gold level sponsor of the conference on 21 October in Lviv for owners and managers of health institutions. The main subject of the conference was how to adapt health services to the state of war. The Bank was represented by a number of its managers at the event. All charity activities of the OTP Group in Ukraine are aimed at bolstering the country's social sphere during the war. The activities performed to provide Ukrainian refugees with access to financial services are described in subsection @2.5. Development of the donation culture and promotion of microdonation OTP Bank makes efforts – through its services and electronic channels, and by involving its employees – to make donation, as an internal motive and practice, become part of everyday life. OTP Bank mapped donation habits in 2022 in a sociological survey on a population of more than 1,000. The findings show that some 81 percent of the Hungarian adult population make donations in various ways. 48 percent of the population opine that donation has increased in importance as a consequence of the coronavirus pandemic and the war between Russia and Ukraine. The most frequent form of donation is offering one percent of the personal income tax to civil society organisations (48%), followed by in -kind donation (36%). A quarter of respondents offer the other one percent of their income personal income tax to churches and 23% of them transfer money directly to accounts of organisations. 19 percent of adults said they never make donations in any form whatsoever. The research was aimed at gaining better understanding of the motives underlying micro-donations. 43 percent of the adult population donate small amounts on a regular basis; 7 percent donate less frequently but larger amounts, for causes they consider to be important. Adults who make donations to organisations on a regular basis give typically not more than HUF 5,000 a month (67%). The survey also found that animal protection is the most frequent target of micro-donations, marked by 26 percent of the respondents as their recipient. This was followed by donations to child protection (23 percent), disadvantaged people (14 percent), people with diseases (12 percent) and persons with disabilities (7 percent). To promote the culture of donation the Bank makes it possible for people to offer micro-donations through its digital banking channels and its ATMs in Hungary. Thousands of donations of HUF 100 -200-500 each may make a world of difference in the life of an organisation, a foundation. The survey found that the very involvement of the Bank may strengthen confidence: customers will be more confident that every last penny of their micro-donations will land on the account of the recipient organisation. Donation was promoted in 2022 by the Bank's communication channels as well. In the year-end donation collection campaign targeted to employees, 413 employees donated a total of more than HUF 3.2 million to which the Bank added another HUF 3.5 million for the benefit of the Humanity Social Foundation. The money was used for supporting families in need, special education instit utions and disadvantaged children. HR OTP Bank Croatia continued its joint programme with Mastercard called "Round up!". The essence of the programme is to enable customers to transfer the difference between the actual total amount of online transactions or card purchases and the amount rounded to the nearest kuna amount optionally to a designated donation account. Since the inception of the programme the Bank has donated HUF 155 million and about 18 thousand customers have donated HUF 51.7 million to hospital equipment. The latest 60 OTP Bank exercises founder’s rights over the Foundation. INTEGRATED ANNUAL REPORT 2022 152 OTP BANK BUSINESS REPORT 2022 (CONSOLIDATED) campaign is focused on children's wards and the counter on the Bank's website shows the target as well as the current amount of donations. BG In 2022 DSK Bank launched its platform @DSK Helps on which they show the projects supported by the Bank; the platform also enables micro-donations (e.g. for residents of the SOS Children's Villages where three families continue to be supported by the Bank in an amount of more than 7 million). Volunteering Volunteering is a tradition for most members of the OTP Group. Group members encourage volunteer initiatives and are happy to contribute to the efforts of employees. OTP Bank's programme called OTP Helyi Érték Önkéntes Pályázati Program (OTP Local Value Volunteer Application Programme) was a success in 2022 as well; teams of volunteers provided assistance for numerous institutions and local communities. The invitation for applications announced twice a year is aimed to enable the Bank to support its employees' voluntary activities in their own communities. The programme provided support for the implementation of ideas of 21 teams in 2022; moreover, the Bank organised two volunteer actions beyond the application framework, as a result of which a total of 451 employees provided assistance to nearly 3,500 people in need. A number of voluntary programmes focused on helping Ukrainian refugees both through collecting and delivering in-kind donations and by organising programmes for children accommodated in OTP resorts, or in the Budapest BOK Hall in connection with the central assistance provided by the Maltese Charity Service. The beneficiary of the grandiose voluntary campaign organised by OTP Bank's retail lending division was the Kozmutza Flóra Primary School, Vocational School and Unified Special Education Methodology Institute. The institution has a several decades long history of successful work in the special education of pre -school and primary school age children and students of medium, severe and multiple disabilities. The participating employees and their external helpers – a total of 224 persons – worked in teams on the maintenance and tidying up of the building and the yard, or tended to the children, or treated them to food, drinks, cakes etc. A number of subsidiary companies and banks are engaged in one-off, or organised voluntary corporate campaigns and some of the banks have great traditions of blood donation. Employees of OTP Ingatlanpont Kft. and OTP Pénzügyi Pont Kft. participated together in workshops, organised by Nevetnikék Foundation manufacturing toys; the wooden toys so produced were used by the foundation as activity aids for children in hospitals. HR The Croatian subsidiary created a dedicated website for organising employees' voluntary activities where they can not only register for participation as volunteers in projects initiated by the Bank but also for supporting the work of civil society organisations. Moreover, as many as 55 of the Bank's employees joined the 'Croatia Volunteers' programme. Voluntary activity performance indicators, 2022 Participants Time spent doing voluntary activity Number of blood donors number of percentage of, relative to total headcount (%) hours persons OTP Bank 766 5.6 6,128 2,596 OTP Group 2,916 7.4 25,028 3,194 Sponsoring of sports OTP Bank a dedicated sponsor of Hungarian football, particularly youth sports Due to the lockdowns during the pandemic the 2021/2022 season was shorter than usual, the 2022/2023 season was the first one after two years in a row when the OTP Bozsik Institution Programme could be started as usual. Accordingly, it was a major achievement that it was in the first season after the pandemic that the largest ever number of school football players – 123 thousand persons – was registered, nearly 9 thousand more than before. 74 percent of the players participating in the programme came from pre-school groups and first four grader primary school classes. Pre-school and primary school teachers thus play a key role – the aim is that they integrate, with adequate qualifications and methodologies, football as a physical activity in day-to-day education and playing activities. RS SI In the other countries the local OTP subsidiaries are main sponsors of the national Olympic teams. MD 500 children can engage in sports at the Zibru Football Academy thanks to the Moldavian subsidiary's sponsorship. The subsidiary also sponsored the charity Hospice Cycling Tour and the Special Olympics. INTEGRATED ANNUAL REPORT 2022 153 OTP BANK BUSINESS REPORT 2022 (CONSOLIDATED) 7. ENVIRONMENTAL POLICY AND ENVIRONMENTAL PROTECTION MEASURES Information and data relating to environmental protection are, in accordance with the Accounting Act, presented separately. The direct environmental impacts of the activities of the Banking Group, as well as the Group's awareness raising activities, are described in this chapter. The environmental risks relating to the provision of financial services are managed and the relevant environmental opportunities are utilised in the framework of the ESG strategy, therefore these activities are discussed in the chapters of the Non- Financial Statement. GRI 305: 3-3 Impacts: Greenhouse gas emissions of operation: The operational functioning of the OTP Group requires the use of natural resources and energy. The resulting environmental impact is significantly smaller than the indirect impacts associated with the provision of financial services. Of the impacts of oper ation only the emission of greenhouse gases (GHG) is considered to be material. Emissions exacerbate climate change and damage the environment and natural assets. The extent of the negative impact depends on the level of emissions, the amount and the way energy is consumed. Reducing emissions helps to combat climate change and protect the environment. However, the practices of the Banking Group also have an awareness raising impact in the segment of environmental protection and the promotion of environmenta l awareness in its operations is a major element of the regional leading role undertaken by the Group in relation to the green transition. Objectives: Efficient use of resources Acts: Carbon-neutral operation whilst observing economic efficiency considerations Encouraging environmentally conscious behaviour in society through our employees and customers Transparency regarding the environmental impacts stemming from our operation, with an emphasis energy consumption and GHG emission Reporting on the environmental impacts of the Group's operation Energy-efficient projects, purchase of green electricity; use of renewable energy sources Reducing paper use through digitalisation; using recycled paper Rationalising business travel Improving waste management Stakeholder engagement/compliance: cooperation with service providers and civil society organisations in implementing environmentally conscious practices, awareness raising among customers and employees, ESG strategic objective on operational emissions (Scope 1-2). For our basic principles concerning environmental protection and the fundamentals of our practice, please visit @our website. In 2022 the subsidiary banks set themselves goals concerning environmental protection as well in relation to their operations under their respective ESG strategies, focusing primarily on energy consumption, carbon dioxide emission and paper use. GRI 2-13 We prepare annual reports on the environmental impact of our operation, for approval by the manager in charge of this function. To enhance knowledge relating to the performance of work, along with general knowledge, every OTP Bank employee is provided with environmental training once every two years. Energy consumption and carbon dioxide emission GRI 305: 3-3, TCFD IV.c Electricity makes up about half of the Banking Group's total energy consumption therefore carbon dioxide emission was significantly reduced in 2022 through the purchase of green electricity. OTP Bank, OTP Bank Croatia and OTP Bank Serbia covered 100 percent, the Slovenian SKB INTEGRATED ANNUAL REPORT 2022 154 OTP BANK BUSINESS REPORT 2022 (CONSOLIDATED) Bank covered 50 percent of its power consumption from green electricity. To make further progress the Slovenian bank plans to increase the proportion of green electricity to 100 percent and has also set itself a goal of net carbon-neutrality by 2023. The Bulgarian subsidiary is reviewing the possibility of increasing its green electricity purchases, the Romanian subsidiary has set itself a target of achieving carbon-neutrality in terms of Scope 1-2 emissions by 2025, through purchasing green electricity and other measures. The Serbian subsidiary wishes to go carbon-neutral by 2027. HR ZelEn The Croatian subsidiary purchased electricity generated exclusively from renewable energy sources from HEP Opskrba. The service provider uses the green electricity surcharge on energy efficiency improving renovations of social institutions, including schools, pre-schools, kindergartens and old people's homes. The changes in energy consumption during the year were massively influenced by the fact that after the lifting of the restrictions introduced in response to the Covid-19 pandemic significantly larger numbers of employees returned to work in the offices, in-person meetings, and so business trips, became more frequent again. Temperatures in buildings were reduced during the heating season in a number of countries in response to the dramatic increase in energy prices – besides environmental considerations. OTP Bank's new LEED Gold certified central building – M12 office building – was delivered. In spite of the outstanding energy efficiency of the new building the total energy consumption increased in 2022, because of the partially parallel use of the buildings. M12 The goal of the design of the new office building in Madarász utca was to create a near-natural, human-oriented and light workplace. The building is a workplace for 3,300 people, therefore public spaces also play an important role in it. The office building of a 86 thousand m2 floor area is the result of five years of development, nearly 40 percent of which is under the ground level, accommodating a car park, bicycle parking facility and building engineering installations. The offices, conference rooms and ancillary rooms and premises are to be found on the seven floors above ground. It took 50,000 m3 of concrete, 6,500 tonnes of reinforcement steel, 48,000 m2 of plasterboard wall, 40,400 m2 false floor and 23,500 m2 hard flooring to build up the new office block. One of the main features of the headquarters building is rich vegetation. The vegetation in the inner courtyards is made up of 212 large trees and 42,500 shrubs – most of them from domestic sources. The plants in the inner courtyard and on the façades, the interior acoustics, the air quality and the lots of natural light all serve to create a near-natural environment in a busy and noisy urban setting. The building earned the LEED Gold certification with solutions such as its up-to-date mechanical engineering and electrical systems, ceiling heating and cooling, the utilisation of the waste heat of the heat pump for producing domestic hot water, the reuse of rainwater and smart lighting control. A large number of electric car chargers were installed in the multi-storey car park. OTP Group uses the best technologies currently available for the purposes of new constructions and ongoing renovations both at its branch network and in its head office buildings. Modernisation of the heating systems, the widest possible use of LED lighting and the installation of additional motion sensors included the most typical types of development projects implemented in order to improve energy efficiency in 2022 as well. A number of our subsidiaries carried out energy efficiency audits and on the basis of their results they will make improvements in 2023. During the replacement of air conditioning units we take care to ensure that the new units are highly energy efficient and use environment-friendly coolants. BG In DSK Bank's office building in Sofia the MClimate IoT solution selected in a startup competition organised by @OTP LAB was tested during the heating period. The system uses sensors to enhance the building's energy efficiency and the comfort perception of the people working in it. The Bank commissioned a building management system. RO OTP Bank Romania has been switching off the electrical displays in the branches during night hours since the end of last year. A HVAC system was installed in the central building and thermostats were installed in several places. By way of the 2022 projects aimed at improving energy efficiency and at using renewable energy OTP Bank saved a total of 1851 GJ energy. The entire OTP Group saved 8080 GJ. The Banking Group is enhancing its own renewable energy generation facilities in view of economic efficiency considerations. The parent bank always examines the possibility of installing solar panels and heat pumps as part of each branch office renovation61. Solar panels and heat pumps were installed in 2022 at two more 61 We are constrained by the fact that many of our branches are located on rented premises or in condominium buildings, where the INTEGRATED ANNUAL REPORT 2022 155 OTP BANK BUSINESS REPORT 2022 (CONSOLIDATED) branches. At Group level, our systems generated a total of 2,034 GJ solar energy. The solar panel systems planned to be installed on 3 buildings of DSK Bank will be placed in service in early 2023. In 2022 OTP Bank used 3022 GJ energy generated by heat pumps. In the wake of the moving of the archive to another location the site's energy requirement decreased. OTP Group’s energy consumption62 was 1,091 thousand GJ in 2022, practically the same as in the preceding year. GRI 305: 3-3, 302-1 Energy consumption within the organisation (GJ) – OTP Bank Natural gas Mineral vehicle fuels Other non-renewable fuel Total non-renewable fuel sources Biogenic vehicle fuels Total renewable fuel sources Electricity District heating Total indirect energy purchased Self-generated renewable energy Total energy consumption3 Total energy consumption per employee4 2018 64,5502 30,527 285 95,362 - 0 129,593 23,953 153,546 1,996 250,904 29.77 2019 65,594 31,829 156 97,579 - 0 129,442 21,584 151,026 2,005 250,610 28.14 20201 63,827 29,444 152 93,423 1,360 1,360 127,537 24,244 151,781 5,166 251,730 26.75 2021 71,219 31,741 585 103,545 2,247 2,247 126,112 25,970 152,082 5,141 263,014 26.73 2022 62,539 34,651 3,501 100,691 2,615 2,615 139,205 22,371 161,575 4,053 268,934 26.17 1 Also includes the consumption of the former Monicomp and eBIZ. 2 GRI 2-4 Data corrected because of previously wrong information. 3 Deviates slightly from the figures in the Annual Report up to 2021 because the finalised consumption data were received at a later date. 4 Until 2019 based on statistical headcount, from 2020 based on average full-time staff number. The energy consumption data originate from metering; some of the solar energy and the heat pump energy is estimated based on information from the manufacturer, for lack of dedicated meters. Wherever necessary, the amounts consumed were converted into energy regarding year 2022 on the basis of calorific values taken from the National Inventory Report (NIR). Earlier we used values from EU regulations and DEFR A. GRI 305: 3-3, 302-1 Energy consumption within the organisation (GJ) – OTP Group Natural gas Mineral vehicle fuels Other non-renewable fuel Total non-renewable fuel sources Biogenic vehicle fuels Renewable fuel Total renewable fuel sources Electricity District heating Total indirect energy purchased Self-generated renewable energy Total energy consumption Total energy consumption per employee 2018 107,697 96,128 475 204,300 - 118 118 408,100 62,637 470,737 6,443 681,598 19.62 2019 143,139 99,801 2,194 245,134 - 134 134 404,040 87,574**** 491,614 6,563 743,445 20.37 2020* 134,738 79,248 1,054 215,040 1,949 134 2,083 438,810 86,514 525,034 6,855 749,302 20.27 2021** 308,237 113,153*** 31,327 452,717 5,583*** 0 5,583 507,376 112,036*** 619,411 5,923 1,083,635 27.49 2022** 272,624 132,183 53,281 458,088 7,576 0 7,576 525,411 94,875 620,286 5,056 1,091,006 29.22 The energy consumption data originate primarily from metering, in the case of certain minor consumptions they come from calcu lations; some of the solar energy and the heat pump energy is estimated based on information from the manufacturer. Wherever necess ary, the amounts consumed were converted into energy regarding year 2022 on the basis of calorific values taken from the National Inventory Report (NIR) and on the basis of the EMEP/EEA guide. Earlier we used values from EU regulations and DEFRA. * The former Expressbank and OTP banka Srbija a.d. The consumption of Beograd is reflected in the data from that year. ** Full consolidated corporate circle. *** GRI 2-4 In 2022 corrected data owing to calculation error, the Banking Group's total energy consumpti on is 0.7% higher than the figure published earlier. **** The district heating figure of OTP Bank Russia is an actual measured figure, significantly above the estimated consumpti on of prior years. installation of solar panels is not feasible. 62 Direct and indirect energy use combined. INTEGRATED ANNUAL REPORT 2022 156 OTP BANK BUSINESS REPORT 2022 (CONSOLIDATED) GRI 305: 3-3, 305-1, 305-2, TCFD IV.b OTP Group’s Scope 1 and Scope 2 CO2e emission (t) 2018 6,714 2,183 2019 6,779 2,272 OTP Bank 20201 6,078 2,123 2021 6,548 2,28 2022 6,67 2,521 2018 14,564 6,938 2019 18,594 7,204 OTP Group 2020 15,282 5,738 2021 29,583 8,2533 2022 29,68 9,752 3,628 3,686 3,587 4,003 3,515 6,053 8,044 7,572 17,323 15,269 885 811 358 228 420 1,5362 3,1402 1,8922 1,8382 1,7082 18 10 10 37 214 37 206 80 2,17 2,951 10,54 9,374 1,166 10,786 9,912 9,883 8,902 9,904 8,802 11,496 45,13 47,947 52,711 56,935 56,035 10,491 42,082 44,012 48,807 51,778 51,601 874 981 1,102 1,004 3,048 3,935 3,904 5,1583 4,434 12,973 8,64 8,35 11,807 7,766 7,369 1,166 874 981 8,369 7,286 1,083 1005 166 839 N/A N/A N/A 47,334 53,196 58,562 44,021 43,399 49,292 53,103 39,442 3,935 3,904 5,4593 4,578 17,254 17,565 15,961 16,452 18,165 59,694 66,541 67,993 86,519 85,715 19,678 15,419 14,428 14,917 7,675 N/A 65,928 68,478 88,146 73,701 19.678 15.419 14.428 14.917 675 N/A 65.928 68.478 87.785 66.701 2,05 1,97 1,7 1,67 1,77 1,72 1,82 1,84 2,19 2,3 N/A N/A 1,53 1,52 0,75 N/A N/A 1,85 2,24 1,97 N/A N/A 1,53 1,52 0,07 N/A N/A 1,85 2,24 1,79 N/A N/A N/A N/A 0,014 N/A N/A N/A N/A 0,044 0 0 97 161 187 0.5 0.6 140 3993 539 air- non- district district Direct (Scope 1) by vehicles from natural gas consumption from conditioning equipment other renewable energy Indirect (Scope 2) Indirect location- based from electricity from heating Indirect market- based from electricity from heating Total (Scope 1 + 2) location- based Total (Scope 1 + 2) market- based Total (Scope1 + with 2) compensation (carbon-offset) Per employee (location-based) employee Per (market-based) Per with compensation Emission intensity turnover million market-based) Biogenic emissions4 per (per HUF, employee The figures shown are calculated from energy consumption, in all cases based on the applicable statutory regulations and the factors stipulated by the authorities and industry organisations. (National Inventory Report (NIR), IPCC, DEFRA, EU Regulation, AIB , and data from suppliers for electricity and district heating). For Scope 1 emissions, country-specific factors are applied from 2022 onwards, subject to availability. We calculate electricity - related emissions using country-specific factors. In the district heating heading, from 2020 we use a Hungarian factor, and in the case of the rest of the countries we uniformly use the data published by DEFRA. In previous years – in the absence of other reliable data – we used the Hungarian emission factors except for Ukraine, Russia and Serbia. The Scope1 emissions, and in 2022 even the district heating, cover all GHG emissions. In the case of the Scope2 emissions the earlier years for district heating in Hungary and the 2019, 2020, 2021 and 2022 electricity factors cover only CO2. In the case of electricity and district heating, 2022 emission factors refer to 2021; at the time of the preparation of this report, more up-to-date factors were not yet available. The GWP values were taken into consideration on the basis of the IPCC’s 4th Assessment Report. 1 Also includes the consumption of the former Monicomp and eBIZ. 2 Headcount-proportionate estimate based on the figures from member companies that supplied accurate data. 3 GRI 2-4 Data retroactively corrected due to calculation error, total emission of the Group is 0.4% higher than previously published. 4 From 2020 it includes renewable-based vehicle fuel emissions. The emissions intensity per turnover is reported from 2022. To offset its 2022 Scope 1 and Scope 2 emissions, OTP Bank purchased carbon credits in early 2022, thereby preventing the emission of 7,000 tonnes of carbon-dioxide. The 2022 emission values were calculated on a preliminary basis which is why there are some residual emissions. The credits purchased by the Bank were verified according to Gold Standard (VER). The Bank found it important that the project supported by way of offsetting be implemented in a country in which the Bank Group operates, therefore it contributed to a project enabling methane separation and power generation at the wastewater treatment plant of Bulgaria’s capital city. INTEGRATED ANNUAL REPORT 2022 157 OTP BANK BUSINESS REPORT 2022 (CONSOLIDATED) Business travel Paper use TCFD IV.b OTP Group’s other indirect (Scope 3) CO2e emissions (t) 2022* OTP Bank 866 696 OTP Group 2,763 2,874 * Includes only emissions arising from our operations; their presentation is partial only. Our goal is to expand the scope co vered continuously. The values are calculated from factors stipulated by the authorities and industry organisations. As for the Banking Group's Scope3 emissions the emissions linked to lending are the most significant. The calculation of furt her emissions under Scope3 is expanded subject to resource capacities. Travel GRI 305: 3-3 The volume of business trips was significantly affected by the fact that the pandemic came to an end. Lockdowns were lifted in 2022, therefore car use across the Banking Group increased; however, on-line meetings continue to be a dominant element of communication. Of the maximum carbon dioxide emission limits applied across the Banking Group in 2022 in relation to car purchases the limits for minibuses and small trucks was changed to 190 g/km because no vehicles with lower values can be found in this category. Among the cars to choose from there are hybrid or electric vehicles in all categories. At the end of 2022, OTP Bank’s fleet included 5 electric cars and 89 hybrid vehicles. HR BG RU The Bulgarian, the Croatian and the Russian subsidiary purchased 13, 3 and 1 hybrid cars during the year, respectively. The total mileage increased by 10 percent and 9 percent year-on-year at the parent bank and across the group, respectively. The increase was driven to a large extent by the lifting of the pandemic -related restrictions. HR In 2022 the Croatian subsidiary commissioned an electric charger at its central building and is looking for opportunities for installing additional ones in 2023. RS The Serbian subsidiary introduced an obligation for its employees to use the high speed railway between Belgrade and Novi Sad instead of travelling by car and prescribed that company cars may only be used when several passengers travel together. To reduce emissions the Bank renewed its car fleet. In addition to company cars, our employees also use their own personal cars for business travel in certain cases (not for commuting to work), and they also order taxi services. At OTP Bank, travelling by taxi and personal vehicles amounted to about 2.4 million kilometres; at Group level this value was 9.1 million63 kilometres. The increase can be partly attributed to the increased accuracy of the reporting. As the coronavirus pandemic declined, air travel increased compared to the previous year. At Group level, our employees took around 5,900 trips64, nearly 40% of which were connected to OTP Bank. Travelling more than doubled year-on-year. Since OTP Bank and its subsidiaries find it important to enable employees to access the workplace by alternative transportation means, several head office buildings are equipped with bicycle storage at Group level. Bicycle storages are available at 60 percent of the branches of OTP Bank for employees and for customers. The parent bank created new storage facilities at its new M12 office building. The Romanian subsidiary installed a new bicycle storage facility in one location. Paper use We are constantly working on cutting our paper use. A steadily increasing range of electronically available services (subsection @3.4) reduces paper consumption as well. OTP Bank introduced in 2022 the so-called GreenPOS, making the printing of the customer's copy of the receipt in the case of card purchases optional, and the printed receipts were also made shorter. This may result in the saving of 87 tonnes of paper at our partners, per year. The SoftPOS product enables Android devices to be used as POS as well, therefore there is no need for paper-based documents in this case either. We plan to make POS document merchant copies also electronically accessible from 2023. Digitalisation of banking processes is under way across the entire Banking Group; more and more internal processes take place fully electronically, rendering printing and paper use unnecessary. At the same time, the paper-based administration demanded by legal requirements inhibit the further reduction of prin ting in Hungary and in other countries. 63 This information is not comprehensive; our Romanian, Russian and Ukrainian subsidiaries, and a few Hungarian subsidiaries were unable to supply data. 64 One-way trip. INTEGRATED ANNUAL REPORT 2022 158 OTP BANK BUSINESS REPORT 2022 (CONSOLIDATED) The share of electronic account statements is increasing. We also encourage their use through the conditions and fees of the application. The majority of OTP Bank's customers (77 percent of retail customers and 1/3rd of large corporate customers) are not provided with paper-based statements. At the Bulgarian subsidiary nearly all of our customers are provided with electronic statements, while e-statements are used exclusively at the Moldavian and the Ukrainian subsidiary. At the Serbian subsidiary two thirds of the customers, at the Croatian bank the majority of the retail customers and half of the corporate customers, are provided with e-statements. At the Romanian subsidiary two thirds of the retail customers and 90 -95 percent of the corporate customers, while at the Slovenian bank the majority of all customers, were issued e-statements. At the Slovenian subsidiary the number of paper-based statements increased lightly for retail customers, because they had to set the printing mode and many of them did not manage to do it correctly. At the Montenegrin subsidiary electronic account statements are used in more than 50% of the cases among corporate customers. A significant number of e-statements are used at the Albanian and the Russian subsidiaries as well but the exact ratios are not known. Across the Group the use of paper at the offices decreased in 2022 again, while at OTP Bank it remained practically unchanged. The parent bank uses 44% recycled paper – because of procurement difficulties. In Hungary, we use FSC-certified paper even in the case of account letters, marketing publications and envelopes, while we use recycled FSC paper for producing DM letters. The internal printing activity of OTP Bank is FSC-certified until 2025. All personal hygiene products used at OTP Bank are exclusively ECO Label products. Some smaller domestic subsidiaries use exclusively recycled paper. HR RO Our Croatian and Romanian subsidiaries plan to procure recycled paper for office use from 2023. The Croatian bank uses recycled paper for promotional materials and internal magazines. RS Our Serbian subsidiary uses FSC-certified and ECF (Elemental Chlorine Free) paper. SI Our Slovenian subsidiary has used PEFC-certified products for years. Across the Group, the share of recycled office paper was 13% – or 9% of all paper used for all purposes – in 2022. Environmentally conscious use and waste management OTP Bank follows the principle of using all of its equipment, devices and machines for the longest time reasonably possible. Furniture is reused several times and we ensure the compatibility of replacements. BG RO RS AL ME At OTP Bank, DSK Bank, OTP Bank Romania and OTP Bank Serbia it is a common practice to donate no longer used but still functional furniture and IT equipment (primarily computers and laptops). At Group level, we donated a total of 423 no longer used computers to charity projects in 2022. Reducing plastic waste is one of our objectives; in addition to our existing practices, plastic cups were started to be replaced with paper cups in 2022 in Bulgaria, Romania and Slovenia. HR RS SI RO ME MD Our subsidiaries in Croatia, Serbia, Slovenia, Romania, Montenegro and Moldova have used toner refills to reduce toner and ink cartridge waste. OTP Group materials and procurement highlights Computers (number of laptops + PCs) (thousand units) Weight of ink cartridges and toners used (t) Amount of office paper (t) Amount of paper used for document sorting and packaging (t) Amount of indirectly used paper (t)4 2018 OTP Bank 2020 2019 2021 2022 2018 OTP Group 2020 2019 2021 2022 15 9 685 43 5 18 8 699 58 7 19 6 478 75 5845 19 4 398 90 491 19 5 397 98 558 451 331 1,955 116 511 511 571 651 351 2,3503 341 1,795 371 1,751 651 351 1,551 117 631 153 903 8296 1,1056 732 897 1 Partly estimate: prorated based on actual data 2 Decrease presumably due to increased precision in data capture 3 In 2019 our Russian subsidiary also added the paper used in POS sales, which it did not include in prior years. This represen ted 320 tons of paper. 4 E.g. marketing publications, account statements 5 Predominantly the consumption of the former Monicomp. 6 The consumption of Nádudvari Élelmiszer Kft. amounts to 500 tonnes. Other than a few improvements, waste collection remained unchanged in most respects in 2022. All members of OTP Group collect and treat hazardous waste and paper containing business sec rets selectively, in compliance with the relevant legal requirements. The other than confidential paper waste, plastic and metal waste, are selectively collected by the group members to varying degrees. In Moldova the selective collection of non-confidential paper waste was started in 2022. In OTP Bank's central office INTEGRATED ANNUAL REPORT 2022 159 OTP BANK BUSINESS REPORT 2022 (CONSOLIDATED) buildings and at the Croatian and the Romanian subsidiaries non-confidential paper waste, PET bottles, metal packaging materials and glass are selectively collected. The Serbian subsidiary collects its paper waste selectively, both in its head office building and at its branches. SKB Bank selects communal waste, including biodegradable food waste, as completely separately as possible. Our Albanian subsidiary collects paper waste comprehensively; this practice has been implemented at our Montenegrin subsidiary in the case of the head office building and the archives. There is selective waste collection in the head office building of our Ukrainian subsidiary and the Sofia and Varna sites of our Bulgarian subsidiary. Quantity of selectively collected waste 2018 417 9,998 OTP Bank 2021 2020 1,120 729 2,203 4,607 2019 809 7,929 2022 880 8,807 2018 1,445 14,348 OTP Group 2020 1,450 5,810 2019 1,323 12,613 2021 1,091 10,685 2022 1,243 29,426 n.a. n.a. 2.766 2.963 3.148 n.a. n.a. n.a. n.a. n.a. Selectively collected waste paper (t) Selectively collected PET bottles, plastic (kg) Communal waste (t) Attitude-shaping The members of the Banking Group launch numerous programmes, awareness raising campaigns and involve employees, to promote environmental awareness and the protection of natural values. Plant-based bank card OTP Bank continued in 2022 the issuance of bank cards of reduced environmental impacts: it provided its 24 thousand private banking customers with plant-based Mastercard Limited Edition bank cards. 84 percent of the card material is made from corn starch, from animal feed material, where the plant protein left from the manufacturing process can be used as animal feed. The bank card's lifetime is the same as that of a conventional card. In addition to the use of an environmentally friendly raw material, the manufacture of such cards has a smaller environmental impact because it takes a third less fossil fuels and results in the emission of 70 percent less GHG than conventional PVC, plastic cards. One such bank card generates, on the whole, approx. 10g less GHG during its life cycle. SI The Slovenian subsidiary is also contemplating the issuance of more environment preserving cars made from recycled material. OTP Bank continued its campaign in cooperation with Mastercard in the Priceless Planet Coalition in 2 022 as well (for more information on DSK Bank's and OTP Bank Serbia's cooperation with Mastercard, see subsection @2.2). The purpose of the initiative is to plant 100 million trees in five years to mitigate the harmful impacts of climate change. Partners participating in the programme mobilise consumers by campaigns to take action for the environment, while they also contribute actively to achieving the goal. OTP Bank enabled the planting of 75 thousand trees in 2022 under the cooperation, 50 percent more than in 2021. HR The Croatian subsidiary sponsored Ekotlon in 2022 as well, the largest plogging competition of Croatia (jogging with picking up litter). More than 500 runners participated in the event. The registration fees were used for sponsorship this year again, for sports associations of people with disabilities. The Bank also sponsored the divers' club cleaning up the Adriatic. RS The Serbian subsidiary celebrated every major international world environmental days during the year through the social media channels. It released a large number of messages in international newsletters on methods of cutting carbon dioxide emission at the workplace and at home. SI The Slovenian subsidiary implemented an extensive internal campaign on environmentally conscious behaviour. The results of the campaign are already reflected by reduced use of lighting and heating – this is expected to be reflected by reductions in consumption figures as well. The Bank's employees planted more than 1000 honey bearing plants in 2022 and produced a total of 72 kg of honey in the beehives on top of the central office. The Bank is making efforts to gather new innovative ideas also by joining the Slovenian Green Network and the Energy Effective Solutions Centre (CER). RO The Romanian subsidiary drew attention to the importance of environmental awareness in messages greeting customers and in its campaigns (e.g. service evaluations) it offered packets of seeds for planting. The subsidiary supported the implementation of the Nature Talks Association Green Week event where more than 300 students from Bucharest participated in interactive environmental workshops. A Green Room has been created at the Bank's headquarters building where children were able to experience the benefi ts of plants and how plants can clean the air. The project's press conference was attended by representatives INTEGRATED ANNUAL REPORT 2022 160 OTP BANK BUSINESS REPORT 2022 (CONSOLIDATED) of the Ministry of Education and the Environmental Ministry as well, and it is planned to be implemented every year in the context of the school Green Weeks event, which is part of a national strategy. Green point hashtag summed up the subsidiary's numerous internal communication activities. The employees participated in voluntary programmes, supporting, inter alia, the Plastic-free Water Association, an organisation working to prevent contamination of the river Danube through the river Zsil. The Bank's 22 employees participated in a garbage collection campaign under the cooperation. UK The "Surrender Your Batteries" campaign of the Ukrainian subsidiary bank – in the framework of which used batteries and accumulators collected nationwide are shipped to a Romanian recycling plant – was continued with limitations as a result of the war. RU The Russian subsidiary drew attention to the importance of environmental protection through excursions, gatherings and articles organised and written with the involvement of its employees. MD In response to the energy crisis the Moldavian bank joined in October a campaign launched by public bodies encouraging responsible electricity consumption to reduce power use. The Bank sponsored the Art Mirror exhibition of posters made from recycled materials. The campaign took place in multiple European cities simultaneously, drawing attention to the importance of reusing or recycling materials. The Bank organised the No Mail Day event in 2022 again, highlighting that even regarding emails, which are part and parcel of our everyday lives now, reasonable use is crucial in terms of sending, processing and storing mail as well. A webinar took place at the Bank regarding the topic, with several invited participants. The Bank started cooperation with the Chisinau Botanic Garden, with the involvement of its employees, to restore a rare tree species. INTEGRATED ANNUAL REPORT 2022 161 OTP BANK BUSINESS REPORT 2022 (CONSOLIDATED) SUPPLEMENTARY DATA INTEGRATED ANNUAL REPORT 2022 162 OTP BANK BUSINESS REPORT 2022 (CONSOLIDATED) FOOTNOTES OF THE TABLE ‘CONSOLIDATED PROFIT AFTER TAX BREAKDOWN BY SUBSIDIARIES (IFRS)’ General note: regarding OTP Core and other subsidiaries, the adjusted profit after tax is calculated without the effect of adjustment items. (1) Aggregated adjusted profit after tax of OTP Core and foreign banks. (2) OTP Core is an economic unit for measuring the result of core business activity of OTP Group in Hungary. Financials of OTP Core are calculated from the partially consolidated IFRS financial statements of certain companies engaged in OTP Group’s operation in Hungary. These companies include OTP Bank Hungary Plc., OTP Mortgage Bank Ltd, OTP Building Society Ltd, OTP Factoring Ltd, OTP Financial Point Ltd., and companies providing intragroup financing; OTP Bank Employee Stock Ownership Plan Organization was included from 4Q 2016; OTP Card Factory Ltd., OTP Facility Management Llc. and MONICOMP Ltd. were included from 1Q 2017; OTP Mobile Service Llc. and OTP Ingatlanpont Llc. were included from 1Q 2019; OTP Ecosystem Ltd. (previous name: OTP eBIZ Ltd.) was included from 1Q 2020; OTP OTP Home Solutions was included from 2Q 2021. The consolidated results of these companies are segmented into OTP Core and Corporate Centre. Latter is a virtual entity. (3) The result and balance sheet of OTP Factoring Bulgaria EAD and DSK Leasing AD is included. (4) The statement of recognised income and balance sheet of OTP Leasing d.d. and SB Leasing d.o.o. was included. (5) The financial performance of OTP Factoring Serbia d.o.o, OTP Lizing d.o.o. and OTP Services d.o.o. is included. (6) The statement of recognised income and balance sheet of OTP Faktoring SRL and OTP Leasing Romania IFN S.A. was included. (7) Figures are based on the aggregated financial statements of OTP Bank JSC, LLC OTP Leasing, and OTP Factoring Ukraine LLC. (8) The statement of recognised income and balance sheet of LLC MFO “OTP Finance” is included. (9) The statement of recognised income and balance sheet of the acquired Podgoricka banka was included, which merged into the Montenegrin bank. (10) The Albanian figures include the balance sheet of the newly acquired Alpha Bank Albania from July 2022 and its P&L contribution from August. (11) The subconsolidated adjusted profit after tax of Merkantil Group (Merkantil Bank Ltd., Merkantil Bérlet Ltd., OTP Real Estate Leasing Ltd., NIMO 2002 Ltd., SPLC-P Ltd., SPLC Ltd.) was presented. (12) LLC AMC OTP Capital, OTP Asset Management SAI S.A. (Romania), DSK Asset Management EAD (Bulgaria). (13) Velvin Ventures Ltd. (Belize), SC Aloha Buzz SRL, SC Favo Consultanta SRL, SC Tezaur Cont SRL (Romania), OTP Osiguranje d.d. (Croatia), OTP Solution Fund (Ukraine), Mendota Invest d.o.o. (Slovenia). (14) Within OTP Group, the Corporate Centre acts as a virtual entity established by the equity investment of OTP Core for managing the wholesale financing activity for all the subsidiaries within OTP Group but outside OTP Core. Therefore the balance sheet of the Corporate Centre is funded by the equity and intragroup lending received from OTP Core, the intragroup lending received from other subsidiaries, and the subordinated debt and senior notes issued by OTP Bank. From this funding pool, the Corporate Centre is to provide intragroup lending to, and hold equity stakes in OTP subsidiaries outside OTP Core. Main subsidiaries financed by Corporate Centre are as follows: Hungarians: Merkantil Bank Ltd, OTP Real Estate Lease Ltd, OTP Fund Management Ltd, OTP Real Estate Fund Management Ltd, OTP Life Annuity Ltd; foreigners: banks, leasing companies, factoring companies. (15) The profit after tax of the Hungarian operation lines include the profit after tax or adjusted profit after tax of the Hungarian subsidiaries and Corporate Centre, as well as the eliminations allocated onto these entities. (16) The profit after tax of the Foreign operation lines include the profit after tax or adjusted profit after tax of the Foreign subsidiaries, as well as the eliminations allocated onto these entities. INTEGRATED ANNUAL REPORT 2022 163 OTP BANK BUSINESS REPORT 2022 (CONSOLIDATED) CALCULATION OF THE ADJUSTED LINES OF IFRS PROFIT AND LOSS STATEMENTS, AS WELL AS THE ADJUSTED BALANCE SHEET LINES PRESENTED IN THE REPORT, AND THE METHODOLOGY FOR CALCULATING THE FX-ADJUSTED VOLUME CHANGES In order to present Group performance reflecting the underlying business trends , the presented consolidated and separate / sub-consolidated profit and loss statements of this report were adjusted in the following way, and the adjusted P&Ls are shown and analysed in the Report (unless otherwise stated). Consolidated financial statements together with separate figures of OTP Bank are disclosed in the Financial Data section. Adjustments affecting the income statement: • The after tax effect of adjustment items (certain, typically non-recurring items from banking operations’ point of view) are shown separately in the Statement of Recognised Income. The following adjustment items emerged in the period under review and the previous year: received dividends, received and paid cash transfers, the effect of goodwill/investment impairment charges, special tax on financial institutions (including the Hungarian windfall tax), the expected one-off negative effect of the debt repayment moratorium in Hungary, the expected one-off effect of the interest rate cap for certain loans in Hungary, the effect of the winding up of Sberbank Hungary, the effect of acquisitions, the result of the treasury share swap agreement, and the impairments on Russian government bonds at OTP Core and DSK Bank booked in 2022. • The following items have been moved from the Other operating expenses line among the Net interest income after loss allowance, impairment and provisions line: Release of loss allowance on securities at fair value through other comprehensive income and on securities at amortized cost, Provision for commitments and guarantees given, Release of impairment of assets subject to operating lease and of investment properties. In the adjusted P&L structure these items are presented amongst the Other provisions (adj.) line (through the Structural correction between Provision for impairment on loan losses and Other provisions adjustment line). From 2021 the Provision for commitments and guarantees given line contains lending activity-related amounts, therefore this line is no longer shifted from 2021. In 3Q 2021 (retrospectively from 3Q 2020) the components of the new Gain from derecognition of financial assets at amortized cost line in the P&L were shifted back in the adjusted P&L structure to the lines on which they were presented previously. From 2022 the provision for impairment on placement losses is presented on the Other provisions line, instead of the previously applied Provision for impairment lon loan losses line. • Other non-interest income is shown together with Gains and losses on real estate transactions, Net insurance result, Gains and losses on derivative instruments, but without the income from the release of pre-acquisition provisions and without received cash transfers. However other non-interest expenses stemming from non-financial activities are added to the adjusted net other non-interest income line, therefore the latter incorporates the net amount of other non-interest income from non-financial activities. • OTP Bank’s share in the change in the shareholders’ equity of companies consolidated with equity method is reclassified from the After tax dividends and net cash transfers line to the Net other non-interest result (adj.) without one-offs line. In the addition to this, OTP Bank has changed the way how private equity funds managed by PortfoLion are recorded. As a result of this, as opposed to the previous method of recording the funds at book value (initial book value less impairments), the funds are evaluated based on their net asset value. The change in the carrying value was reclassified to the Net other non-interest result (adj.) without one-offs line in the adjusted P&L structure. • Other provisions are separated from other expenses and shown on a separate line in the adjusted profit or loss statement. • Other administrative expenses have been adjusted in the following way in order to create a category comprising administrative cost items exclusively. Other costs and expenses and other non-interest expenses were included into the adjusted Other non-interest expenses. At the same time, the following cost items were excluded from adjusted other non- interest expenses: paid cash transfers (except for movie subsidies and cash transfers to public benefit organisations), Other other non-interest expenses stemming from non-financial activities, and special tax on financial institutions. • Tax deductible transfers (offset against corporate taxes) paid by Hungarian group members were reclassified from Other non-interest expenses to Corporate income tax. As a result, the net P&L effect of these transfers (i.e. the paid transfer less the related corporate tax allowances) is recognised in the corporate income tax line of the adjusted P&L. • The financial transaction tax paid in Hungary is reclassified from other (administrative) expenses to net fee and commission income, both on consolidated and OTP Core level. • The Compensation Fund contributions are recognized on the Other administrative expenses line of the income statement, and are presented on the financial transaction tax and/or Special tax on financial institutions line the in the adjusted P&L structure (due to the tax deductibility). • Due to the introduction of IFRS16, certain items previously presented on the Other non-interest expenses line (rental fees) were moved to the interest expenses and depreciation lines in the income statement. These items were shifted back to the Other non-interest expenses line in the adjusted P&L structure. • The currency exchange result was shifted in the P&L structure from the FX result to the net fees and commissions line. In the adjusted P&L structure this item is moved to the FX result line. • The Modification gains or losses line (one of the components of the Provision for impairment on loan and placement losses) was presented on a separate line in the P&L structure. In the adjusted P&L this line was shifted back to the INTEGRATED ANNUAL REPORT 2022 164 OTP BANK BUSINESS REPORT 2022 (CONSOLIDATED) Provision for impairment on loan and placement losses line. Secondly, the Gains and losses on non-trading securities mandatorily at fair value through profit or loss line was moved from the Gains / losses on securities to the Fair value adjustment on financial instruments measured at fair value through profit or loss line in the P&L structure. In the adjusted P&L this item remained part of the Gains / losses on securities. Thirdly, from 2021 the local business taxes and the innovation contribution payable by Hungarian Group members were booked on the Income tax expenses line, whereas these items were recognised amongst the Other general expenses. • The expected one-off effect of the interest rate cap for certain loans in Hungary line contains the expected effect of the rate cap in the second half of 2022 and first half of 2023. The expected effect of the rate cap effective in 1H 2022 was presented in 4Q 2021 amongst the risk costs of OTP Core. • The effect of the winding up of Sberbank Hungary line represents the combined impact of the extraordinary contribution payable into the Deposit Protection Fund in relation to the compensation of depositors, and the net present value of the expected recovery from the sale of Sberbank assets. • Performance indicators (such as cost/income ratio, net interest margin, risk cost to average gross loans as well as ROA and ROE ratios, etc.) presented in this report are calculated on the basis of the adjusted profit and loss statement excluding adjustment items (unless otherwise indicated). Starting from 2022, the Provision for impairment on loan losses line is in the numerator of the Provision for impairment on loan losses-to-average gross loans ratio, which, as opposed to previous periods, does not include the provision for impairment on placement losses. • Within the report, FX-adjusted statistics for business volume developments and their product breakdown, as well as the FX-adjusted stock of allowances for loan losses are disclosed, too. For FX adjustment, the closing cross currency rates for the current period were used to calculate the HUF equivalent of loan and deposit volumes in the base periods. Thus the FX-adjusted volumes will be different from those published earlier. • The FX-adjusted changes of certain consolidated or sub-consolidated P&L lines in HUF terms are presented in this Report. According to the applied methodology in the case of the P&L lines, the FX effect is filtered out only in relation to the currency of the given country, irrespective of the transactional currency mix in which the given P&L line materialized. Thus, for instance, as for the consolidated FX-adjusted operating cost development, the effect of the Hungarian Forint rate changes against the given currency is not eliminated in the case of the cost items arising in FX within the Hungarian cost base. Adjustments affecting the balance sheet: • In the adjusted balance sheet, net customer loans include the stock of finance lease receivables. • In the adjusted balance sheets presented in the analytical section of the report, the total amount of accrued interest receivables related to Stage 3 loans under IFRS 9 were netted with the provisions created in relation to the total exposure toward those particular clients, in case of the affected Group members. Therefore, this adjustment made on the balance sheet has an impact on the consolidated gross customer loans and allowances for loan losses. INTEGRATED ANNUAL REPORT 2022 165 OTP BANK BUSINESS REPORT 2022 (CONSOLIDATED) Alternative performance measures pursuant to the National Bank of Hungary 5/2017. (V.24.) recommendation65 Description Calculation (data in HUF million) divided by that institution's total exposure measure and shall be expressed as a percentage. The leverage ratio is The leverage ratio shall be calculated as an institution’s capital measure calculated pursuant to Article 429 CRR. The calculation of the indicator is designed quarterly by the Bank for the prudential consolidation circle. 3,369,616.3 35,517,511.6 3,002,328.2 29,860,866.0 Example for 2021: Example for 2022: = 10.1% 9.5% = The LCR is expressed as: (stock of HQLA) / (total net cash outflows over the next 30 calendar days) ≥ 100%. The numerator of the LCR is the stock of HQLA (High Quality Liquid Assets). In order to qualify as HQLA, assets should be liquid in markets during a time of stress and, in most cases, be eligible for use in central bank operations. The denominator of the LCR is the total net cash outflows, defined as total expected cash outflows minus total expected cash inflow in the specified stress scenario for the subsequent 30 calendar days. Total cash inflows are subject to an aggregate cap of 75% of total expected cash outflows, thereby ensuring a minimum level of HQLA holdings at all times. Example for 2022: 7,439,159.8 6,175,742.4 - 1,852,865.4 Example for 2021: 5,299,489.8 4,860,023.0 - 1,914,897.1 = 172.1% = 179.9% Measures value 2021 2022 10.1% 9.5% 179.9% 172.1% Alternative performance measures name Leverage, consolidated66 Liquidity Coverage Ratio (LCR) ROE (accounting), consolidated According to Article 412 (1) of CRR, the liquidity coverage ratio (LCR) is designed to promote short-term resilience of the Issuer’s / Group's liquidity risk profile and aims to ensure that the Issuer / Group has an adequate stock of unencumbered High Quality Liquid Assets (HQLA) to meet its liquidity needs for a 30 calendar day liquidity stress scenario. The return on equity ratio shall be calculated the consolidated accounting after-tax profit for the given period divided by the average equity, thus shows the effectiveness of the use of equity. The numerator of the indicator is the consolidated accounting profit after tax for the given period (annualized for periods less than one year), the denominator is the average consolidated equity. (The definition of average equity: calendar day-weighted average of the average balance sheet items in periods comprising the given period, where periods comprising the given period are defined as quarters (and within that months) in case of 1H, 9M and FY periods, and months in case of quarters. Furthermore, the average of the average balance sheet items is computed as the arithmetic average of closing balance sheet items for the previous period and the current period.) Example for 2022: 347,081.1 * 1.0 3,160,118.9 Example for 2021: 456,427.7 * 1.0 2,686,982.7 = 11.0% = 17.0% 17.0% 11.0% 65 The NBH’s recommendation (5/2017, 24 May) on Alternative Performance Measures (APM) came into effect from 1 June 2017, in line with ESMA’s guidance (ESMA/2015/1415) on the same matter. The recommendation is aimed at – amongst other things – enhancing the transparency, reliability, clarity and comparability of those APMs within the framework of regulated information and thus facilitating the protection of existing and potential investors. 66 Based on the prudential consolidation scope, which is different from the consolidation scope used in this report. INTEGRATED ANNUAL REPORT 2022 166 OTP BANK Alternative performance measures name ROE (adjusted), consolidated ROA (adjusted), consolidated Operating profit margin (adjusted, without one-off items), consolidated Total income margin (adjusted, without one-off items), consolidated Net interest margin (adjusted), consolidated Operating cost (adjusted)/ total assets, consolidated Description The return on equity ratio shall be calculated the consolidated adjusted profit after tax for the given period divided by the average equity, thus shows the effectiveness of the use of equity. The return on asset ratio shall be calculated the consolidated adjusted net profit for the given period divided by the average total asset, thus shows the effectiveness of the use of equity. The operating profit margin shall be calculated the consolidated adjusted net operating profit without one-off items for the given period divided by the average total assets, thus shows the effectiveness of the operating profit generation on total assets. The total income margin shall be calculated the consolidated adjusted total income without one- off items for the given period divided by the average total assets, thus shows the effectiveness of income generation on total assets. The net interest margin shall be calculated the consolidated adjusted net interest income for the given period divided by the average total assets, thus shows the effectiveness of net interest income generation on total assets. The indicator shows the operational efficiency. BUSINESS REPORT 2022 (CONSOLIDATED) Calculation (data in HUF million) Measures value 2021 2022 The numerator of the indicator is the consolidated adjusted profit after tax for the given period (annualized for periods less than one year), the denominator is the average consolidated equity. Example for 2022: 592,547.0 * 1.0 3,160,118.9 = 18.8% 18.5% 18.8% Example for 2021: 496,901.5 * 1.0 2,686,982.7 = 18.5% The numerator of the indicator is the consolidated adjusted net profit for the given period, the denominator is the average consolidated total asset. (The definition of average asset: calendar day-weighted average of the average balance sheet items in periods comprising the given period, where periods comprising the given period are defined as quarters (and within that months) in case of 9M, 9M and FY periods, and months in case of quarters. Furthermore, the average of the average balance sheet items is computed as the arithmetic average of closing balance sheet items for the previous period and the current period.) Example for 2022: 592,547.0 * 1.0 31,190,136.9 = 1.9% 2.0% 1.9% Example for 2021: 496,901.5 * 1.0 25,194,346.0 = 2.0% The numerator of the indicator is the consolidated adjusted net operating profit without one-off items for the given period, the denominator is the average consolidated total assets. Example for 2022: 868,486.7 * 1.0 31,190,136.9 = 2.78% 2.62% 2.78% Example for 2021: 660,390.7 * 1.0 25,194,346.0 = 2.62% The numerator of the indicator is the consolidated adjusted total income without one-off items for the given period (annualized for periods less than one year), the denominator is the average consolidated total assets. Example for 2022: 1,656,571.0 * 1.0 31,190,136.9 = 5.31% 5.21% 5.31% Example for 2021: 1,313,123.5 * 1.0 25,194,346.0 = 5.21% The numerator of the indicator is the consolidated adjusted net interest income for the given period (annualized for periods less than one year), the denominator is the average consolidated total assets. Example for 2022: 1,093,578.8 * 1.0 31,190,136.9 = 3.51% 3.51% 3.51% Example for 2021: 884,012.2 * 1.0 25,194,346.0 = 3.51% The numerator of the indicator is the consolidated adjusted operating cost for the given period (annualized for periods less than one year), the denominator is the average consolidated total assets. Example for 2022: 788,084.3 * 1.0 31,190,136.9 = 2.53% 2.59% 2.53% Example for 2021: 652,732.8 * 1.0 25,194,346.0 = 2.59% INTEGRATED ANNUAL REPORT 2022 167 OTP BANK BUSINESS REPORT 2022 (CONSOLIDATED) Alternative performance measures name Cost/income ratio (adjusted, without one-off items), consolidated Description The indicator is another measure of operational efficiency. Calculation (data in HUF million) Measures value 2021 2022 The numerator of the indicator is the consolidated adjusted operating cost for the given period, the denominator is the adjusted operating income (without one-off items) for the given period. Example for 2022: Example for 2021: 788,084.3 1,656,571.0 652,732.8 1,313,123.5 = 47.6% 49.7% 47.6% = 49.7% Provision for impairment on loan and placement losses (adjusted)/ average (adjusted) gross loans, consolidated The indicator provides information on the amount of impairment on loan and placement losses relative to gross customer loans. Total risk cost (adjusted)/ total asset ratio, consolidated The indicator shows the amount of total risk cost relative to the balance sheet total. Effective tax rate (adjusted), consolidated The indicator shows the amount of corporate income tax accounted on pre-tax profit. The numerator of the indicator is the consolidated adjusted provision for impairment on loan and placement losses for the given period (annualized for periods less than one year), the denominator is the adjusted consolidated gross customer loans for the given period. (The definition of average (adjusted) gross customer loans: calendar day-weighted average of the average balance sheet items in periods comprising the given period, where periods comprising the given period are defined as quarters (and within that months) in case of 1H, 9M and FY periods, and months in case of quarters. Furthermore, the average of the average balance sheet items is computed as the arithmetic average of closing balance sheet items for the previous period and the current period.) Example for 2022: 135,231.1 * 1.0 = 0.73% 18,639,432.7 Example for 2021: 46,005.6 * 1.0 15,132,360.4 = 0.30% The numerator of the indicator is consolidated adjusted total risk cost for the given period (annualized for periods less than one year), the denominator is the average consolidated total assets for the given period. 1.0 Example for 2022: 178,464.7 * = 0.57% 31,190,136.9 Example for 2021: 72,538.1 * 1.0 25,194,346.0 = 0.29% The numerator of the indicator is consolidated adjusted corporate income tax for the given period, the denominator is the consolidated adjusted pre-tax profit for the given period. Example for 2022: = 14.1% 97,475.0 690,022.0 0.30% 0.73% 0.29% 0.57% 15.5% 14.1% Example for 2021: 90,951.2 587,852.6 = 15.5% Net loan/(deposit+retail bonds) ratio (FX- adjusted), consolidated The net loan to deposit+retail bonds ratio is the indicator for assessing the bank's liquidity position. The numerator of the indicator is the consolidated net consumer loan volume (gross loan reduced the amount of provision), the denominator is the end of period consolidated consumer FX-adjusted deposit volume plus the end of period retail bond volume (issued by OTP Bank). Example for 2022: 18,640,624.3 25,158,557.6 + 35,766.3 = 74% 75% 74% Example for 2021: 16,655,366.8 22,164,853.5 + = 75% 0.0 INTEGRATED ANNUAL REPORT 2022 168 OTP BANK BUSINESS REPORT 2022 (CONSOLIDATED) ADJUSTMENTS ON THE CONSOLIDATED STATEMENT OF PROFIT OR LOSS (IFRS) Net interest income (+) Presentation of the revaluation result of intra-group swaps on the net interest income line realized at the Romanian and Slovakian operations (-) Netting of interest revenues on DPD90+ loans with the related provision (booked on the Provision for loan losses line) (-) Effect of acquisitions (-) Initial NPV gain on the monetary policy interest rate swap (MIRS) deals (-) Reclassification due to the introduction of IFRS16 (+) Presentation of the contribution from discontinued operation on the adjusted P&L lines (-) Expected one-off negative effect of the debt repayment moratorium in Hungary and Serbia Net interest income (adj.) Net fees and commissions (+) Financial Transaction Tax (-) Effect of acquisitions (-) Structural shift of income from currency exchange from net fees to the FX result Net fees and commissions (adj.) Foreign exchange result (-) Presentation of the revaluation result of intra-group swaps on the net interest income line realized at the Romanian and Slovakian operations (-) Effect of acquisitions (+) Presentation of the contribution from discontinued operation on the adjusted P&L lines (+) Structural shift of income from currency exchange from net fees to the FX result Foreign exchange result (adj.) Gain/loss on securities, net (-) Effect of acquisitions (+) Presentation of the contribution from discontinued operation on the adjusted P&L lines (-) Revaluation result of the treasury share swap agreement (+) Structural adjustment due to the Gain from derecognition of financial assets at amortized cost line (against Gain/loss on securities, net) (+) Shifting of the Gains and losses on non-trading securities mandatorily at fair value through profit or loss line from the Net other non-interest income to the Gains or losses from securities line Gain/loss on securities, net (adj.) Result of discontinued operation and gains from disposal of subsidiaries classified as held for sale (-) Effect of acquisitions Result of discontinued operation and gains from disposal of subsidiaries classified as held for sale (adj.) Gains and losses on real estate transactions Result of discontinued operation and gains from disposal of subsidiaries classified as held for sale (adj.) (+) Other non-interest income (+) Gains and losses on derivative instruments (+) Net insurance result (+) Losses on loans measured mandatorily at fair value through other comprehensive income and on securities at amortized cost (-) Shifting of the Gains and losses on non-trading securities mandatorily at fair value through profit or loss line from the Net other non-interest income to the Gains or losses from securities line (-) Received cash transfers (+) Other other non-interest expenses (+) Change in shareholders' equity of companies consolidated with equity method, and the change in the net asset value of the private equity funds managed by PortfoLion (-) Effect of acquisitions (-) Presentation of the revaluation result of intra-group swaps on the net interest income line realized at the Romanian and Slovakian operations (-) One-off impact of the CHF mortgage loan conversion programme and regulatory changes related to mortgage loans in Romania (-) Netting of refunds related to legal cases (accounted for on the Net other non-interest result line) with the release of provisions created earlier for these cases (accounted for on the Other provisions line) from 1Q 2017 at OTP Bank Romania (+) Presentation of the contribution from discontinued operation on the adjusted P&L lines (+) Shifting of the costs of mediated services at Merkantil Bérlet Ltd. to the net other non-interest result line (+) Structural adjustment due to the Gain from derecognition of financial assets at amortized cost line (against Net other non-interest result) (-) Expected one-off effect of the interest rate cap for certain loans in Hungary Net other non-interest result (adj.) 2022 HUF million 1,091,314 2,034 5,335 -3,179 0 -2,386 0 0 1,093,579 600,361 -89,751 -2 113,494 397,118 -14,989 7,818 -4 0 113,494 90,691 -4,488 -556 0 -10,002 -4,636 145 1,579 11,444 0 11,444 5,269 11,444 118,777 10,558 1,370 -4,164 145 447 -72,969 840 3,268 -5,783 -591 -275 0 -1,846 -492 -2,022 73,604 2021 HUF million 874,310 625 1,131 -2,680 0 -1,556 46 -5,925 884,012 442,177 -68,818 -33 47,843 325,548 -4,075 -492 0 -10 47,843 44,251 5,559 -1,077 14 2,766 1,031 4,812 9,726 116 -165 282 6,424 282 74,246 6,797 657 -532 4,812 165 -44,882 11,155 -4 1,117 -948 -194 387 49,586 INTEGRATED ANNUAL REPORT 2022 169 OTP BANK BUSINESS REPORT 2022 (CONSOLIDATED) Gain from derecognition of financial assets at amortized cost (-) Structural adjustment due to the Gain from derecognition of financial assets at amortized cost line (against Gain/loss on securities, net) (-) Structural adjustment due to the Gain from derecognition of financial assets at amortized cost line (against Provision for impairment on loan losses) (-) Structural adjustment due to the Gain from derecognition of financial assets at amortized cost line (against Net other non-interest result) Gain from derecognition of financial assets at amortized cost (adj.) Provision for impairment on loan and placement losses (+) Modification gains or losses (+) Change in the fair value attributable to changes in the credit risk of loans mandatorily measured at fair value through profit of loss (+) Loss allowance on securities at fair value through other comprehensive income and on securities at amortized cost (+) Provision for commitments and guarantees given (+) Impairment of assets subject to operating lease and of investment properties (-) One-off impact of the CHF mortgage loan conversion programme and regulatory changes related to mortgage loans in Romania (+) Netting of interest revenues on DPD90+ loans with the related provision (booked on the Provision for loan losses line) (-) Structural correction between Provision for loan losses and Other provisions (-) Expected one-off negative effect of the debt repayment moratorium in Hungary and Serbia (+) Structural adjustment due to the Gain from derecognition of financial assets at amortized cost line (against Provision for impairment on loan losses) (-) Shifting of provision for impairment on placement losses to the other provisions line from 1Q 2022 (-) Expected one-off effect of the interest rate cap for certain loans in Hungary Provision for impairment on loan losses (adj.) Dividend income (+) Received cash transfers (+) Paid cash transfers (-) Sponsorships, subsidies and cash transfers to public benefit organisations (-) Dividend income of swap counterparty shares kept under the treasury share swap agreement (-) Change in shareholders' equity of companies consolidated with equity method, and the change in the net asset value of the private equity funds managed by PortfoLion After tax dividends and net cash transfers Depreciation (-) Goodwill impairment charges (-) Effect of acquisitions (-) Reclassification due to the introduction of IFRS16 (+) Presentation of the contribution from discontinued operation on the adjusted P&L lines Depreciation (adj.) Personnel expenses (-) Effect of acquisitions (+) Presentation of the contribution from discontinued operation on the adjusted P&L lines (-) Shifting of the support granted to the Special Employee Partial Ownership Plan Organizations booked within the Personnel expenses to the Other non-interest expenses line Personnel expenses (adj.) Income taxes (-) Corporate tax impact of goodwill/investment impairment charges (-) Corporate tax impact of the special tax on financial institutions (+) Tax deductible transfers (offset against corporate taxes) (-) Corporate tax impact of the effect of acquisitions (+) Presentation of the contribution from discontinued operation on the adjusted P&L lines (-) Corporate tax impact of the expected one-off negative effect of the debt repayment moratorium in Hungary and Serbia (-) Corporate tax impact of the result of the treasury share swap agreement (-) Corporate tax impact of the impairments on Russian government bonds booked at OTP Core and DSK Bank in 2022 (-) Corporate tax impact of the winding up of Sberbank Hungary (contribution to the Deposit Protection Fund) (-) Corporate tax impact of the expected one-off effect of the interest rate cap for certain loans in Hungary Corporate income tax (adj.) 2022 HUF million -1,655 -4,636 3,473 -492 0 -155,680 -39,997 13,346 -60,775 -6,145 -1,205 138 5,335 -61,979 -4,816 3,473 -261 -36,005 -135,231 14,641 447 -17,709 -17,519 12,130 840 1,927 -175,303 -67,715 -4,917 -18,008 0 -84,663 -402,563 -1,259 0 -5,000 -396,304 -59,252 8,461 5,456 -14,479 543 0 244 900 3,494 1,027 3,618 -97,475 2021 HUF million 1,884 1,031 854 0 -27,723 -13,672 -16,289 -3,974 -99 438 339 1,131 -3,536 -10,131 854 -46,006 15,648 165 -11,992 -11,873 3,809 11,155 729 -94,995 0 -6,134 -16,064 -20 -72,816 -340,684 -781 -298 -340,201 -72,123 1,909 1,787 -8,137 5,738 -18 1,487 -249 -90,951 INTEGRATED ANNUAL REPORT 2022 170 OTP BANK BUSINESS REPORT 2022 (CONSOLIDATED) Other operating expense (-) Other costs and expenses (-) Other non-interest expenses (-) Effect of acquisitions (-) One-off impact of the CHF mortgage loan conversion programme and regulatory changes related to mortgage loans in Romania (-) Netting of refunds related to legal cases (accounted for on the Net other non-interest result line) with the release of provisions created earlier for these cases (accounted for on the Other provisions line) from 1Q 2017 at OTP Bank Romania (+) Structural correction between Provision for loan losses and Other provisions (+) Presentation of the contribution from discontinued operation on the adjusted P&L lines (-) Expected one-off negative effect of the debt repayment moratorium in Hungary and Serbia (-) Impairments on Russian government bonds booked at OTP Core and DSK Bank in 2022 (+) Shifting of provision for impairment on placement losses to the other provisions line from 1Q 2022 (-) Shifting of certain expenses arising from mediated services from other provisions to the other non- interest expenses line (-) Expected one-off effect of the interest rate cap for certain loans in Hungary Other provisions (adj.) Other administrative expenses (+) Other costs and expenses (+) Other non-interest expenses (-) Paid cash transfers (+) Film subsidies and cash transfers to public benefit organisations (-) Other other non-interest expenses (-) Special tax on financial institutions (recognised as other administrative expenses) (-) Tax deductible transfers (offset against corporate taxes) (-) Financial Transaction Tax (-) Effect of acquisitions (+) Reclassification due to the introduction of IFRS16 (+) Presentation of the contribution from discontinued operation on the adjusted P&L lines (-) Expected one-off negative effect of the debt repayment moratorium in Hungary and Serbia (-) Shifting of the costs of mediated services at Merkantil Bérlet Ltd. to the net other non-interest result line (+) Shifting of certain expenses arising from mediated services from other provisions to the other non- interest expenses line (-) Effect of the winding up of Sberbank Hungary (contribution to the Deposit Protection Fund) (+) Shifting of the support granted to the Special Employee Partial Ownership Plan Organizations booked within the Personnel expenses to the Other non-interest expenses line Other non-interest expenses (adj.) 2022 HUF million -128,785 -17,279 -90,678 -1,341 453 275 -61,979 0 2,104 -38,268 -261 -882 -2,175 -43,234 -464,998 -17,279 -90,678 -17,709 -17,519 -72,969 -96,808 -14,479 -89,751 -4,654 -20,395 0 0 -1,846 -882 -11,416 -5,000 -307,117 2021 HUF million -85,733 -6,508 -56,874 0 609 194 -3,536 4 -153 -26,532 -311,931 -6,508 -56,874 -11,992 -11,873 -44,882 -20,680 -8,137 -68,818 -10,370 -17,620 -106 -318 -239,716 INTEGRATED ANNUAL REPORT 2022 171 OTP BANK BUSINESS REPORT 2022 (CONSOLIDATED) ADJUSTMENTS OF CONSOLIDATED IFRS BALANCE SHEET LINES Gross customer loans (incl. finance lease receivables and accrued interest receivables related to loans) (-) Accrued interest receivables related to DPD90+ / Stage 3 loans Gross customer loans (adjusted) Allowances for loan losses (incl. impairment of finance lease receivables) (-) Allocated provision on accrued interest receivables related to DPD90+ / Stage 3 loans Allowances for loan losses (adjusted) 2022 HUF million 19,690,287 46,730 19,643,558 -1,049,663 -46,730 -1,002,933 2021 HUF million 16,670,469 36,015 16,634,454 -926,547 -36,015 -890,532 INTEGRATED ANNUAL REPORT 2022 172 OTP BANK BUSINESS REPORT 2022 (CONSOLIDATED) STATEMENT OF PROFIT OR LOSS OF OTP BANK PLC., ACCORDING TO IFRS STANDARDS AS ADOPTED BY THE EUROPEAN UNION (CONSOLIDATED)1 CONTINUING OPERATIONS Interest income calculated using the effective interest method Income similar to interest income Interest incomes Interest expenses NET INTEREST INCOME Risk cost total Loss allowance / Release of loss allowance on loans, placements, amounts due from banks and repo receivables Change in the fair value attributable to changes in the credit risk of loans mandatorily measured at fair value through profit of loss Loss allowance / Release of loss allowance on securities at fair value through other comprehensive income and on securities at amortized cost Provision for commitments and guarantees given Impairment / (Release of impairment) of assets subject to operating lease and of investment properties NET INTEREST INCOME AFTER RISK COST Income from fees and commissions Expense from fees and commissions Net profit from fees and commissions Modification gain or loss Foreign exchange gains / losses, net Foreign exchange gains / losses, net Gains and losses on derivative instruments Gains / Losses on securities, net Gains / Losses on financial assets /liabilities measured at fair value through profit or loss Gain from derecognition of financial assets at amortized cost Profit from associates Other operating income Gains and losses on real estate transactions Other non-interest income Net insurance result Other operating expense Net operating income Personnel expenses Depreciation and amortization Other administrative expenses Other administrative expenses PROFIT BEFORE INCOME TAX Income tax expense PROFIT AFTER INCOME TAX FOR THE PERIOD FROM CONTINUING OPERATIONS From this, attributable to: Non-controlling interest Owners of the company DISCONTINUED OPERATIONS Gains from disposal of subsidiary classified as held for sale Net loss / gain from discontinued operation PROFIT AFTER INCOME TAX FROM CONTINUING AND DISCOUNTINUED OPERATION 2022 HUF million 2021 HUF million Change % 1,508,050 495,973 2,004,023 (912,709) 1,091,314 (210,458) 922,539 194,920 1,117,459 (243,149) 874,310 (47,645) (155,681) (27,721) 63 154 79 275 25 342 462 13,346 (16,289) (182) (60,774) (3,974) (6,145) (1,204) 880,856 739,576 (139,216) 600,360 (39,997) (4,431) (14,989) 10,558 (4,488) (99) 438 826,665 554,113 (111,939) 442,174 (13,672) 2,723 (4,075) 6,798 5,560 (4,164) (532) (1,655) 14,640 125,415 5,269 118,777 1,370 (128,785) (3,468) (402,563) (175,303) (464,997) (1,042,863) 394,888 (59,251) 1,885 15,648 81,328 6,424 74,246 657 (85,732) 20,880 (340,684) (94,996) (311,932) (747,612) 528,435 (72,123) 335,637 456,312 727 334,910 11,444 0 836 455,476 0 116 347,081 456,428 (375) 7 33 24 36 193 (263) 268 55 (181) 683 (188) (6) 54 (18) 60 109 50 (117) 18 85 49 39 (25) (18) (26) (13) (26) (100) (24) 1 The rows of the table are based on audited numbers, but the structure of the table can differ from the IFRS financial statements presented in the Annual Report (certain rows might be merged or represent different level of aggregation). INTEGRATED ANNUAL REPORT 2022 173 OTP BANK BUSINESS REPORT 2022 (CONSOLIDATED) STATEMENT OF FINANCIAL POSITION OF OTP BANK PLC., ACCORDING TO IFRS STANDARDS AS ADOPTED BY THE EUROPEAN UNION (CONSOLIDATED)1 Cash, amounts due from banks and balances with the National Banks Placements with other banks, net of loss allowance for placements Repo receivables Financial assets at fair value through profit or loss Securities at fair value through other comprehensive income Loans at amortized cost Loans mandatorily at fair value through profit or loss Finance lease receivables Associates and other investments Securities at amortized cost Property and equipment Intangible assets and goodwill Right(of(use assets Investment properties Derivative financial assets designated as hedge accounting Deferred tax assets Current income tax receivable Other assets Assets classified as held for sale / discontinued operations TOTAL ASSETS Amounts due to banks, the National Governments, deposits from the National Banks and other banks Repo liabilities Financial liabilities designated at fair value through profit or loss Deposits from customers Liabilities from issued securities Derivative financial liabilities held for trading Derivative financial liabilities designated as hedge accounting Leasing liabilities Deferred tax liabilities Current income tax payable Provisions Other liabilities Subordinated bonds and loans TOTAL LIABILITIES Share capital Retained earnings and reserves Treasury shares Total equity attributable to the parent Total equity attributable to non(controlling interest TOTAL SHARHOLDERS' EQUITY TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY 2022 HUF million 4,221,392 1,351,082 41,009 436,387 1,739,603 16,094,458 1,247,414 1,298,752 73,849 4,891,938 464,469 237,031 58,937 47,452 48,247 75,421 5,650 471,119 0 32,804,210 2021 HUF million 2,556,035 1,584,861 61,052 341,397 2,224,510 13,493,183 1,068,111 1,182,628 67,222 3,891,335 411,136 248,631 50,726 29,882 18,757 15,109 29,978 276,785 2,046 27,553,384 1,463,158 1,567,348 217,369 54,191 25,188,805 870,682 385,747 27,949 63,778 40,094 28,866 131,621 707,654 301,984 29,481,898 28,000 3,395,215 (106,862) 3,316,353 5,959 3,322,312 32,804,210 79,047 41,184 21,068,644 436,325 202,716 11,228 53,286 24,045 36,581 119,799 598,081 278,334 24,516,618 28,000 3,109,509 (106,941) 3,030,568 6,198 3,036,766 27,553,384 Change % 65 (15) (33) 28 (22) 19 17 10 10 26 13 (5) 16 59 157 399 (81) 70 (100) 19 (7) 175 32 20 100 90 149 20 67 (21) 10 18 8 20 0 9 0 9 (4) 9 19 1 The rows of the table are based on audited numbers, but the structure of the table can differ from the IFRS financial statements presented in the Annual Report (certain rows might be merged or represent different level of aggregation). INTEGRATED ANNUAL REPORT 2022 174 OTP BANK BUSINESS REPORT 2022 (CONSOLIDATED) CONSOLIDATED SUBSIDIARIES AND ASSOCIATES (in the consolidated financial statements according to IFRS) Name of the company 1 OTP Bank Plc. 2 OTP Real Estate Ltd. 3 BANK CENTER No. 1. Ltd. 4 OTP Fund Management Ltd. 5 OTP Factoring Ltd. 6 OTP Close Building Society 7 Merkantil Bank Ltd. 8 OTP Factoring Management Ltd. 9 INGA KETTŐ Ltd. 10 Merkantil Bérlet Ltd. 11 OTP Mortgage Bank Ltd. 12 OTP Funds Servicing and Consulting Company Limited 13 DSK Bank AD 14 DSK Tours EOOD 15 DSK Trans Security EAD 16 POK DSK-Rodina AD 17 NIMO 2002 Ltd. 18 OTP Real Estate Investment Fund Management Ltd. 19 OTP Card Factory Ltd. 20 OTP Bank Romania S.A. 21 DSK Asset Management EAD 22 OTP banka dioničko društvo 23 Air-Invest Ltd. 24 DSK Leasing AD 25 OTP Invest društvo s ograničenom odgovornošću za upravljanje fondovima 26 OTP Nekretnine d.o.o. 27 SPLC-P Ltd. 28 SPLC Ltd. 29 OTP Real Estate Leasing Ltd. 30 OTP Life Annuity Real Estate Investment Plc. 31 OTP Leasing d.d. 32 Joint-Stock Company OTP Bank 33 JSC "OTP Bank" (Russia 34 Montenegrin Commercial Bank Shareholding Company, Podgorica Montenegro 35 OTP banka Srbija, joint-stock company, Novi Sad) 36 OTP Investments d.o.o. Novi Sad 37 OTP Leasing Romania IFN S.A. 38 OTP Ingatlanpont Ltd. 39 OTP Hungaro-Projekt Ltd. 40 OTP Financing Netherlands 41 OTP Mérnöki Ltd. 42 OTP Ingatlanüzemeltető Ltd. 43 Limited Liability Company Asset Management Company " OTP Capital" 44 CRESCO d.o.o. 45 LLC OTP Leasing 46 OTP Asset Management SAI S.A. 47 OTP Financing Solutions 48 Velvin Ventures Ltd. 49 OTP Factoring Romania Llc. 50 OTP Factoring Ukraine LLC 51 OTP Insurance Broker EOOD 52 PortfoLion Venture Capital Fund Management Ltd. 53 OTP Factoring Bulgaria JSCo. 54 SC Aloha Buzz SRL 55 SC Favo Consultanta SRL 56 SC Tezaur Cont SRL 57 OTP Holding Ltd. 58 OTP Debt Collection d.o.o. Podgorica 59 OTP Factoring Serbia Ltd. 60 MONICOMP Ltd. 61 CIL Babér Ltd. 62 Project 01 Consulting, s. r. o. 63 R.E. Four d.o.o., Novi Sad 64 OTP Financial point Ltd. 65 Bajor-Polár Center Real Estate Management Ltd. 66 OTP Mobile Service Ltd. 67 OTP Holding Malta Ltd. 68 OTP Financing Malta Company Limited 69 LLC MFO "OTP Finance" 70 OTP Travel Limited Country of tax authority Main field of activity monetary intermediation Hungary sale and purchase of self-owned real estate Hungary Hungary property rental and management Hungary fund management Hungary other financial services Hungary monetary intermediation monetary intermediation Hungary sale and purchase of self-owned real estate Hungary property rental and management Hungary property rental and management; rental of machines and tools monetary intermediation financial supplementary activity monetary intermediation travel agency security services pension insurance property rental and management fund management production of plastic products monetary intermediation fund management monetary intermediation passenger air transport financial leasing Hungary Hungary Bulgaria Bulgaria Bulgaria Bulgaria Hungary Hungary Hungary Romania Bulgaria Croatia Hungary Bulgaria Hungary fund management Croatia Croatia Hungary development of construction projects property rental and management commerce of passenger vehicle, real estate rental and management lending, financial leasing Hungary sale and purchase of self-owned real estate Hungary financial leasing monetary intermediation monetary intermediation Croatia Ukraine Russia Hungary monetary intermediation monetary intermediation other financial services financial leasing property brokerage business consulting financial holding engineering activity property management fund management Montenegro Serbia Serbia Romania Hungary Hungary Netherlands Hungary Hungary Ukraine sale and purchase of self-owned real estate Croatia Ukraine financial leasing Romania fund management Netherlands credit claims Russia property brokerage Romania other financial services Ukraine receivables management, credit mediation Bulgaria activities of insurance agents and brokers Hungary fund management Bulgaria factoring, commercial credit Romania other financial services Romania other financial services Romania other financial services Ciprus other financial services Montenegro other financial intermediation Serbia other financial services Hungary computer and peripherals maintenance Hungary property rental and management other financial services Slovakia sale and purchase of self-owned real estate Serbia financial supplementary activity property rental and management IT services financial holding lending microfinance activity travel agency Hungary Hungary Hungary Malta Malta Russia Hungary INTEGRATED ANNUAL REPORT 2022 175 OTP BANK BUSINESS REPORT 2022 (CONSOLIDATED) Name of the company OTP Ecosystem Limited Liability Company; OTP Ecosystem Llc. 71 Main field of activity Country of tax authority other information technology services Hungary 72 DSK ventures EAD 73 OTP ESOP 74 PEVEC d.o.o. Beograd 75 PortfoLion Digital Ltd. 76 OTP Ingatlankezelő Ltd. 77 MFM Project Investment and Development Ltd. 78 OTP Leasing d.o.o. Beograd commercial mediation, marketing, IT services financial supplementary activity storage business consulting property management property rental and management financial leasing 79 Venture Closed-End Non Diversified Mutual Investment Fund "OTP Solution" investment fund 80 OTP Services Ltd. 81 DSK DOM EAD 82 ShiwaForce.com Inc. 83 OTP Leasing EOOD 84 Regional Urban Development Fund AD 85 Banka OTP Albania SHA 86 EiSYS Ltd. 87 OTP Leasing Srbija d.o.o. Beograd 88 OTP Osiguranje AKCIONARSKO DRUŠTVO ZA 89 OTP Bank S.A. 90 AppSense Ltd. 91 SKB Banka d.d. Ljubljana 92 SKB Leasing d.o.o. 93 SKB Leasing Select d.o.o. 94 OTP Home Solutions Limited Liability Company 95 Georg d.o.o 96 OD Ltd. 97 Balansz Real Estate Institute Fund 98 PortfoLion Zöld Fund 99 PortfoLion Digitális Magántőkealap I. 100 PortfoLion Regionális Fund 101 PortfoLion Regionális Fund II. 102 PortfoLion Partner Fund 103 PortfoLion Digitális Magántőkealap II. 104 Nemesszalóki Ltd. 105 ZA-Invest Béta Ltd. 106 NAGISZ Mezőgazdasági Termelő és Szolgáltató Ltd. 107 Nádudvari Ltd. 108 HAGE Ltd. 109 AFP Private Equity Invest Ltd. 110 Mendota Invest, Nepremicninska druzba, d.o.o. 111 ZA-Invest Delta Ltd. commerce of passenger vehicle credit mediation computer programming financial leasing financing of urban development plans monetary intermediation IT consultancy financial leasing insurance monetary intermediation computer programming monetary intermediation financial leasing financial leasing data processing business consulting computer programming investment fund investment fund investment fund investment fund investment fund investment fund investment fund agricultural activity agricultural activity agricultural activity agricultural activity agricultural activity asset management (holding) property developer and manager asset management (holding) Bulgaria Hungary Serbia Hungary Hungary Hungary Serbia Ukraine Serbia Bulgaria Hungary Bulgaria Bulgaria Albania Hungary Serbia Serbia Moldova Hungary Slovenia Slovenia Slovenia Hungary Croatia Hungary Hungary Hungary Hungary Hungary Hungary Hungary Hungary Hungary Hungary Hungary Hungary Hungary Hungary Slovenia Hungary INTEGRATED ANNUAL REPORT 2022 176 INDEPENDENT AUDITORS’ REPORTS 2022 (CONSOLIDATED AND SEPARATE, IN ACCORDANCE WITH IFRS) INTEGRATED ANNUAL REPORT 2022 177 OTP BANK AUDITORS’ REPORTS INTEGRATED ANNUAL REPORT 2022 178 OTP BANK AUDITORS’ REPORTS INTEGRATED ANNUAL REPORT 2022 179 OTP BANK AUDITORS’ REPORTS INTEGRATED ANNUAL REPORT 2022 180 OTP BANK AUDITORS’ REPORTS INTEGRATED ANNUAL REPORT 2022 181 OTP BANK AUDITORS’ REPORTS INTEGRATED ANNUAL REPORT 2022 182 OTP BANK AUDITORS’ REPORTS INTEGRATED ANNUAL REPORT 2022 183 OTP BANK AUDITORS’ REPORTS INTEGRATED ANNUAL REPORT 2022 184 OTP BANK AUDITORS’ REPORTS INTEGRATED ANNUAL REPORT 2022 185 OTP BANK AUDITORS’ REPORTS INTEGRATED ANNUAL REPORT 2022 186 OTP BANK AUDITORS’ REPORTS INTEGRATED ANNUAL REPORT 2022 187 OTP BANK AUDITORS’ REPORTS INTEGRATED ANNUAL REPORT 2022 188 OTP BANK AUDITORS’ REPORTS INTEGRATED ANNUAL REPORT 2022 189 OTP BANK AUDITORS’ REPORTS INTEGRATED ANNUAL REPORT 2022 190 OTP BANK AUDITORS’ REPORTS INTEGRATED ANNUAL REPORT 2022 191 OTP BANK AUDITORS’ REPORTS INTEGRATED ANNUAL REPORT 2022 192 OTP BANK AUDITORS’ REPORTS INTEGRATED ANNUAL REPORT 2022 193 OTP BANK AUDITORS’ REPORTS INTEGRATED ANNUAL REPORT 2022 194 OTP BANK AUDITORS’ REPORTS INTEGRATED ANNUAL REPORT 2022 195 OTP BANK AUDITORS’ REPORTS INTEGRATED ANNUAL REPORT 2022 196 OTP BANK AUDITORS’ REPORTS INTEGRATED ANNUAL REPORT 2022 197 OTP BANK AUDITORS’ REPORTS INTEGRATED ANNUAL REPORT 2022 198 OTP BANK AUDITORS’ REPORTS INTEGRATED ANNUAL REPORT 2022 199 SEPARATE FINANCIAL STATEMENTS IN ACCORDANCE WITH IFRS (2022) INTEGRATED ANNUAL REPORT 2022 200 OTP BANK IFRS REPORT (SEPARATE) OTP BANK PLC. SEPARATE STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 2022 (in HUF mn) Note 2022 2021 Cash, amounts due from banks and balances with the National Bank of Hungary Placements with other banks Repo receivables Financial assets at fair value through profit or loss Financial assets at fair value through other comprehensive income Securities at amortised cost Loans at amortised cost Loans mandatorily measured at fair value through profit or loss Investments in subsidiaries Property and equipment Intangible assets Right of use assets Investment properties Deferred tax assets Current tax assets Derivative financial assets designated as hedge accounting relationships Other assets TOTAL ASSETS Amounts due to banks and deposits from the National Bank of Hungary and other banks Repo liabilities Deposits from customers Leasing liabilities Liabilities from issued securities Financial liabilities designated at fair value through profit or loss Derivative financial liabilities designated as held for trading Derivative financial liabilities designated as hedge accounting relationships Deferred tax liabilities Current tax liabilities Provisions Other liabilities Subordinated bonds and loans TOTAL LIABILITIES Share capital Retained earnings and reserves Treasury shares TOTAL SHAREHOLDERS' EQUITY 5. 6. 7. 8. 9. 10. 11. 11. 12. 13. 13. 14. 34. 34. 15. 16. 17. 18. 19. 20. 21. 22. 23. 34. 34. 24. 24. 25. 26. 27. 28. 1,092,198 2,899,829 246,529 410,012 797,175 3,282,373 4,825,040 793,242 1,596,717 94,564 69,480 39,882 4,207 35,742 1,569 47,220 329,752 474,945 2,567,212 33,638 246,462 641,939 3,071,038 4,032,465 662,012 1,573,008 81,817 62,161 17,231 4,328 - - 17,727 224,488 16,565,531 13,710,471 1,736,128 408,366 11,119,158 41,464 498,709 16,576 373,401 50,623 - 3,199 29,656 313,188 294,186 1,051,203 86,580 9,948,532 17,932 22,153 20,133 192,261 18,690 1,507 4,776 21,527 238,437 271,776 14,884,654 11,895,507 28,000 1,655,601 (2,724) 28,000 1,845,836 (58,872) 1,680,877 1,814,964 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY 16,565,531 13,710,471 Budapest, 31 March 2023 Dr. Sándor Csányi Chairman and Chief Executive Officer László Wolf Deputy Chief Executive Officer INTEGRATED ANNUAL REPORT 2022 201 OTP BANK IFRS REPORT (SEPARATE) OTP BANK PLC. SEPARATE STATEMENT OF PROFIT OR LOSS FOR THE YEAR ENDED 31 DECEMBER 2022 (in HUF mn) Interest Income: Interest income calculated using the effective interest method Income similar to interest income Interest income and similar to interest income total Interest Expense: Interest expenses total NET INTEREST INCOME Loss allowance on loan, placement and repo receivables losses Loss allowance on securities at fair value through other comprehensive income and on securities at amortised cost Provision for loan commitments and financial guarantees given Change in the fair value attributable to changes in the credit risk of loans mandatorily measured at fair value through profit of loss Risk cost total Note 29. 29. Year ended 31 December 2022 Year ended 31 December 2021 721,679 377,231 1,098,910 302,373 105,663 408,036 29. (802,020) (155,491) 296,890 252,545 6., 7., 11., 30. (47,687) (38,841) 9., 10., 30. 24., 30. 45.4. (53,238) (5,541) 11,872 (94,594) (1,484) (130) (16,255) (56,710) NET INTEREST INCOME AFTER RISK COST 202,296 195,835 LOSSES ARISING FROM DERECOGNITION OF FINANCIAL ASSETS MEASURED AT AMORTISED COST MODIFICATION LOSS Income from fees and commissions Expenses from fees and commissions NET PROFIT FROM FEES AND COMMISSIONS Foreign exchange gains and (losses) (Losses) and gains on securities, net Losses on financial instruments at fair value through profit or loss Net results on derivative instruments and hedge relationships Dividend income Other operating income Other operating expenses NET OPERATING INCOME Personnel expenses Depreciation and amortization Other administrative expenses OTHER ADMINISTRATIVE EXPENSES PROFIT BEFORE INCOME TAX Income tax PROFIT AFTER INCOME TAX Earnings per share (in HUF) Basic Diluted 4. 31. 31. 32. 32. 32. 32. 32. 33. 33. 33. 33. 33. 34. 43. 43. (56,195) (14,856) 362,444 (66,087) 296,357 541 (10,605) (18,790) 9,917 194,526 13,775 (131,942) 57,422 (154,303) (46,738) (290,989) (492,030) (7,006) 13,638 6,632 (2,700) (7,017) 300,803 (52,276) 248,527 (5,638) 2,104 (6,494) 3,436 99,037 11,265 (41,636) 62,074 (136,126) (40,692) (178,611) (355,429) 141,290 (15,951) 125,339 24 24 455 455 INTEGRATED ANNUAL REPORT 2022 202 OTP BANK IFRS REPORT (SEPARATE) OTP BANK PLC. SEPARATE STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR ENDED 31 DECEMBER 2022 (in HUF mn) Year ended 31 December 2022 Year ended 31 December 2021 Note PROFIT AFTER INCOME TAX 6,632 125,339 Items that may be reclassified subsequently to profit or loss: Fair value adjustment of debt instruments at fair value through other comprehensive income Deferred tax (9%) related to fair value adjustment of debt instruments at fair value through other comprehensive income Gains / (Losses) on separated currency spread of financial instruments designated as hedging instrument Deferred tax (9%) related to (losses) / gains on separated currency spread of financial instruments designated as hedging instrument (Losses) / Gains on derivative financial instruments designated as cash flow hedge Items that will not be reclassified to profit or loss: Gains on equity instruments at fair value through other comprehensive income Fair value adjustment of equity instruments at fair value through other comprehensive income Deferred tax (9%) related to equity instruments at fair value through other comprehensive income Total TOTAL COMPREHENSIVE INCOME 34. 34. 34. (55,804) (37,163) 5,186 (4,887) 440 3,410 1,681 (151) (5,641) (6,307) 2,675 61 (41) - 1,407 (281) (58,011) (37,404) (51,379) 87,935 INTEGRATED ANNUAL REPORT 2022 203 OTP BANK IFRS REPORT (SEPARATE) OTP BANK PLC. SEPARATE STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY FOR THE YEAR ENDED 31 DECEMBER 2022 (in HUF mn) Note Share Capital Capital reserve Retained earnings and other reserves Treasury Shares Total comprehensive comprehensive Balance as at 1 January 2021 Net profit for the period Other income Total income Share-based payment Payments to ICES holders Increase due to termination of ICES bonds Sale of treasury shares Acquisition shares Loss on treasury shares Other transaction with owners treasury of comprehensive comprehensive Balance as at 1 January 2022 Net profit for the period Other movement Other income Total income Share-based payment Sale of treasury shares Acquisition shares Loss on sale of treasury shares Dividend for the year 2021 Other transaction with owners treasury of 39. 28. 28. 28. 39. 28. 28. 28,000 - 52 - - - - - - - - - - 28,000 - - - - - - - - - - - - - - - - - - - 52 - - - - - - - - - - 1,697,081 125,339 (37,404) 87,935 3,589 (3,734) 75,422 - - (15,543) (46,799) - - - - - - 264,360 (276,433) - 1,678,334 125,339 (37,404) 87,935 3,589 (3,734) 75,422 264,360 (276,433) (15,543) 59,734 (12,073) 47,661 1,845,784 6,632 2 (58,011) (51,377) 2,948 - (58,872) - - - - - 72,416 1,814,964 6,632 2 (58,011) (51,377) 2,948 72,416 - (16,268) (16,268) (21,558) (120,248) - - (21,558) (120,248) (138,858) 56,148 (82,710) Balance as at 31 December 2022 28,000 52 1,655,549 (2,724) 1,680,877 INTEGRATED ANNUAL REPORT 2022 204 OTP BANK IFRS REPORT (SEPARATE) OTP BANK PLC. SEPARATE STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 31 DECEMBER 2022 (in HUF mn) OPERATING ACTIVITIES Profit before income tax Note 2022 2021 (7,006) 141,290 Net accrued interest Depreciation and amortization Loss allowance on loans and placements Loss allowance on securities at fair value through other comprehensive income Impairment loss / (Reversal of impairment loss) on investments in subsidiaries Loss allowance on securities at amortised cost Loss allowance / (Release of loss allowance) on other assets Provision on off-balance sheet commitments and contingent liabilities Share-based payment Unrealised losses on fair value adjustment of financial instruments at fair value through profit or loss Unrealised losses / (gains) on fair value adjustment of derivative financial instruments Gains on securities Interest expense from leasing liabilities Foreign exchange loss Proceeds from sale of tangible and intangible assets Net changing in assets and liabilities in operating activities Net increase in placements with other banks and repo receivables before allowance for placement losses Changes in held for trading securities Change in financial instruments mandatorily measured at fair value through profit or loss Changes in derivative financial instruments at fair value through profit or loss Net increase in loans Increase in other assets, excluding advances for investments and before provisions for losses Net increase in amounts due to banks and deposits from the National Bank of Hungary and other banks and repo liabilities Financial liabilities designated as fair value through profit or loss Net increase in deposits from customers Increase in other liabilities Net increase in the compulsory reserve established by the National Bank of Hungary Dividend income Income tax paid 13. 30. 9. 12. 10. 16. 24. 39. 45. 45. 32. 35. 32. 33. 6., 7. 8. 8. 8. 11. 16. 17., 18. 21. 19. 24. 5. 12. (11,196) 46,873 63,939 25,615 93,513 27,623 2,939 7,598 2,948 11,870 52,840 62,354 (1,186) 9,359 (267) (521,731) (44,181) 1,925 136 (817,297) (2,205) 40,784 38,841 (551) 27,420 2,035 (961) 1,473 3,589 23,051 30,962 6,212 (214) 35,136 82 (879,438) (24,178) 6,687 (1,303) (835,520) (99,813) (49,201) 910,984 (1,625) 971,640 77,424 (641,125) (194,526) (19,953) 224,661 (1,853) 1,989,941 114,259 (23,270) (99,037) (15,259) Net cash provided by operating activities 9,674 753,433 INTEGRATED ANNUAL REPORT 2022 205 OTP BANK IFRS REPORT (SEPARATE) OTP BANK PLC. SEPARATE STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 31 DECEMBER 2022 (in HUF mn) [continued] Note 2022 2021 INVESTING ACTIVITIES Purchase securities at fair value through other comprehensive income Proceeds from sale of securities at fair value through other comprehensive income Change in derivative financial instruments designated as hedge accounting Increase in investments in subsidiaries Decrease in investments in subsidiaries Dividend income Increase in securities at amortised cost Redemption of securities at amortised cost Additions to property, equipment and intangible assets Disposal of property, equipment and intangible assets Net (increase) / decrease in investment properties Net cash used in investing activities FINANCING ACTIVITIES Leasing payments Cash received from issuance of securities Cash used for redemption of issued securities Cash received from issuance of subordinated bonds and loans Cash used for redemption of subordinated bonds and loans Payments to ICES holders Increase of Treasury shares Decrease of Treasury shares Dividends paid Net cash provided by financing activities Net decrease in cash and cash equivalents Cash and cash equivalents at the beginning of the year Cash and cash equivalents at the end of the year Interest received Interest paid 9. 9. 12. 12. 10. 10. 13. 13. 14. 20. 20. 25. 25. 27. 28. 28. 27. (1,322,153) (850,030) 1,074,212 13,805 (117,222) - 194,449 (624,476) 415,975 (60,575) 648 (14) 1,081,372 1,341 (51,456) - 98,091 (1,253,830) 214,963 (46,081) 529 (2,484) (425,351) (807,585) (6,189) 575,994 (91,635) 6,781 (7,523) - (16,268) 50,858 (120,213) (5,136) 5,897 (9,051) 1,874 (35,518) (3,735) (276,433) 248,819 (10) 391,805 (73,293) (23,872) (127,445) 375,642 503,087 351,770 941,406 511,635 375,642 345,504 98,395 INTEGRATED ANNUAL REPORT 2022 206 OTP BANK IFRS REPORT (SEPARATE) NOTE 1: ORGANIZATION AND BASIS OF FINANCIAL STATEMENTS 1.1. General information OTP Bank Plc. ("Bank" or "OTP Bank") was established on 31 December 1990, when the previously State-owned company was transformed into a limited liability company. The Bank’s registered office address is 16, Nádor Street, Budapest 1051. Internet homepage: http://www.otpbank.hu/ Signatory of the separate financial statements is the Chief Executive Officer, dr. Sándor Csányi and Deputy Chief Executive Officer, László Wolf. The Bank’s owners have the power to amend the separate financial statements after issue if applicable. These financial statements are authorised for issue on 31 March 2023 by the Board of Directors. Responsible person for the control and management of accounting services: Zoltán Tuboly (Budapest), Managing Director of Accounting and Financial Directorate, Registration Number: 177289, IFRS qualified chartered accountant. Due to Hungarian legislation audit services are statutory for OTP Bank. Disclosure information about the auditor: Ernst & Young Audit Ltd. (001165), 1132 Budapest Váci Street 20. Registered under 01-09-267553 by Budapest- Capital Regional Court, as registry court. Statutory registered auditor: Zsuzsanna Nagyváradiné Szépfalvi, registration number: 005313. Audit service fee agreed by the Annual General Meeting of the Bank for the year ended 2022 is an amount of HUF 165 million + VAT. All other fees charged by the Auditor for non-audit services during the financial year are disclosed in the consolidated financial statements of the Bank. In 1995, the shares of the Bank were introduced on the Budapest and the Luxembourg Stock Exchanges and were also traded on the SEAQ board on the London Stock Exchange and PORTAL in the USA. The structure of the Share capital by shareholders (%): Domestic and foreign private and institutional investors Employees Treasury shares Total 2022 99% 1% - 100% 2021 98% 1% 1% 100% The Bank’s Registered Capital consists of 280.000.010 pieces of ordinary shares with the nominal value of HUF 100 each, representing the same rights to the shareholders. The Bank provides a full range of commercial banking services through a nationwide network of 352 branches in Hungary. Number of employees Average number of employees 1.2. Basis of accounting 2022 10,317 10,516 2021 10,078 9,934 These Separate Financial Statements were prepared based on the assumption of the Management that the Bank will remain in business for the foreseeable future. The Bank will not be forced to halt operations and liquidate its assets in the near term at what may be very low fire-sale prices. The Bank maintains its accounting records and prepares their statutory accounts in accordance with the commercial, banking and fiscal regulations prevailing in Hungary. The presentation and functional currency of the Bank is the Hungarian Forint ("HUF"). The separate financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as adopted by the European Union (“EU”). INTEGRATED ANNUAL REPORT 2022 207 OTP BANK IFRS REPORT (SEPARATE) NOTE 1: ORGANIZATION AND BASIS OF FINANCIAL STATEMENTS [continued] 1.2.1. The effect of adopting new and revised IFRS standards effective from 1 January 2022 The following amendments to the existing standards and new interpretation issued by the International Accounting Standards Board (IASB) and adopted by the EU are effective for the current reporting period: • Amendments to IFRS 1 “First-time Adoption of International Financial Reporting Standards”, IFRS 9 “Financial Instruments”, IAS 41 “Agriculture”– “Annual Improvements to IFRSs 2018-2020 Cycle” - adopted by EU on 28 June 2021 (effective for annual periods beginning on or after 1 January 2022), o IFRS 1 First-time Adoption of International Financial Reporting Standards – Subsidiary as a first- time adopter The amendment permits a subsidiary that elects to apply paragraph D16(a) of IFRS 1 to measure cumulative translation differences using the amounts reported in the parent’s consolidated financial statements, based on the parent’s date of transition to IFRS, if no adjustments were made for consolidation procedures and for the effects of the business combination in which the parent acquired the subsidiary. This amendment is also applied to an associate or joint venture that elects to apply paragraph D16(a) of IFRS 1. These amendments had no impact on the consolidated financial statements of the Group as it is not a first-time adopter. IFRS 9 Financial Instruments – Fees in the ’10 per cent’ test for derecognition of financial liabilities The amendment clarifies the fees that an entity includes when assessing whether the terms of a new or modified financial liability are substantially different from the terms of the original financial liability. These fees include only those paid or received between the borrower and the lender, including fees paid or received by either the borrower or lender on the other’s behalf. There is no similar amendment proposed for IAS 39 Financial Instruments: Recognition and Measurement. In accordance with the transitional provisions, the Group applies the amendment to financial liabilities that are modified or exchanged on or after the beginning of the annual reporting period in which the entity first applies the amendment (the date of initial application). These amendments had no impact on the consolidated financial statements of the Group as there were no fees charged or incurred related to modifications during the period. IAS 41 Agriculture – Taxation in fair value measurements The amendment removes the requirement in paragraph 22 of IAS 41 that entities exclude cash flows for taxation when measuring the fair value of assets within the scope of IAS 41. These amendments had limited impact on the consolidated financial statements of the Group as it have limited assets in scope of IAS 41 as at the reporting date. o o • Amendments to IFRS 3 “Business Combinations”; IAS 16 “Property, Plant and Equipment”; IAS 37 “Provisions, Contingent Liabilities and Contingent Assets” – adopted by the EU on 28 June 2021 Annual Improvements (effective for annual periods beginning on or after 1 January 2022). o IFRS 3 Business Combinations (Amendments) update a reference in IFRS 3 to the previous version of the IASB’s Conceptual Framework for Financial Reporting to the current version issued in 2018 without significantly changing the accounting requirements for business combinations. IAS 16 Property, Plant and Equipment (Amendments) prohibit a company from deducting from the cost of property, plant and equipment any proceeds from the sale of items produced while bringing the asset to the location and condition necessary for it be capable of operating in the manner intended by management. Instead, a company recognizes such sales proceeds and related cost in profit or loss. IAS 37 Provisions, Contingent Liabilities and Contingent Assets (Amendments) specify which costs a company includes in determining the cost of fulfilling a contract for the purpose of assessing whether a contract is onerous. The amendments clarify, the costs that relate directly to a contract to provide goods or services include both incremental costs and an allocation of costs directly related to the contract activities. o o The adoption of these amendments to the existing standards has not led to any material changes in these Separate Financial Statements. INTEGRATED ANNUAL REPORT 2022 208 OTP BANK IFRS REPORT (SEPARATE) NOTE 1: ORGANIZATION AND BASIS OF FINANCIAL STATEMENTS [continued] 1.2.2. New and revised Standards and Interpretations issued by IASB and adopted by the EU but not yet effective • Amendments to IAS 1 “Presentation of Financial Statements” and IFRS Practice Statement 2- Disclosure of Accounting policies – adopted by the EU on 2 March 2022 (effective for annual periods beginning on or after 1 January 2023 with earlier application permitted) o The amendments provide guidance on the application of materiality judgements to accounting policy disclosures. In particular, the amendments to IAS 1 replace the requirement to disclose ‘significant’ accounting policies with a requirement to disclose ‘material’ accounting policies. Also, guidance and illustrative examples are added in the Practice Statement to assist in the application of the materiality concept when making judgements about accounting policy disclosures. • Amendments to IAS 8 “Accounting policies, Changes in Accounting Estimates and Errors” – Definition of Accounting Estimates – adopted in the EU on 2 March 2022 (effective for annual periods beginning on or after 1 January 2023 with earlier application permitted and apply to changes in accounting policies and changes in accounting estimates that occur on or after the start of that period ) o The amendments introduce a new definition of accounting estimates, defined as monetary amounts in financial statements that are subject to measurement uncertainty, if they do not result from a correction of prior period error. Also, the amendments clarify what changes in accounting estimates are and how these differ from changes in accounting policies and corrections of errors. • Amendments to IFRS 17 “Insurance Contracts” – adopted by the EU on 19 November 2021 (effective for annual periods beginning on or after 1 January 2023) – IFRS 17 is not relevant in case of these Separate Financial Statements • Amendments to IFRS 17 “Insurance Contracts” – Initial application of IFRS 17 and IFRS 9 – Comparative Information – adopted by the EU on 8 September 2022 (effective date for annual periods beginning on or after 1 January 2023 with earlier application permitted, provided the entity also applies IFRS 9 Financial Instruments on or before the date it first applies IFRS 17) – IFRS 17 is not relevant in case of these Separate Financial Statements. • Amendments to IAS 12 “Income Taxes” – Deferred Tax related to Assets and Liabilities arising from a Single Transaction – adopted by the EU on 11 August 2022 (effective for annual periods beginning on or after 1 January 2023; earlier applicaton permitted) o The amendments narrow the scope of and provide further clarity on the initial recognition exception under IAS 12 and specify how companies should account for deferred tax related to assets and liabilities arising from a single transaction, such as leases and decommissioning obligations. The amendments clarify that where payments that settle a liability are deductible for tax purposes, it is a matter of judgement, having considered the applicable tax law, whether such deductions are attributable for tax purposes to the liability or to the related asset component. Under the amendments, the initial recognition exception does not apply to transactions that, on initial recognition, give rise to equal taxable and deductible temporary differences. It only applies if the recognition of a lease asset and lease liability (or decommissioning liability and decommissioning asset component) give rise to taxable and deductible temporary differences that are not equal. INTEGRATED ANNUAL REPORT 2022 209 OTP BANK IFRS REPORT (SEPARATE) NOTE 1: ORGANIZATION AND BASIS OF FINANCIAL STATEMENTS [continued] 1.2.3. Standards and Interpretations issued by IASB but not yet adopted by the EU At present, IFRS as adopted by the EU do not significantly differ from regulations adopted by the IASB except for the following new standards, amendments to the existing standards and new interpretation, which were not endorsed for use in EU as at date of publication of these financial statements: • Amendments to IAS 1 “Presentation of Financial Statements” - Classification of Liabilities as Current or Non-Current (effective for annual periods beginning on or after 1 January 2024; earlier applicaton permitted) o The objective of the amendments is to clarify the principles in IAS 1 for the classification of liabilities as either current or non-current. The amendments clarify the meaning of a right to defer settlement, the requirement for this right to exist at the end of the reporting period, that management intent does not affect current or non-current classification, that options by the counterparty that could result in settlement by the transfer of the entity’s own equity instruments do not affect current or non-current classification. Also, the amendments specify that only covenants with which an entity must comply on or before the reporting date will affect a liability’s classification. Additional disclosures are also required for non-current liabilities arising from loan arrangements that are subject to covenants to be complied with within twelve months after the reporting period. • Amendments to IFRS 16 “Leases” – Lease Liability in a Sale and Leaseback – issued by IASB on 22 September 2022 (effective for annual periods beginning on or after 1 January 2024 with earlier application permitted) o The amendments are intended to improve the requirements that a seller-lessee uses in measuring the lease liability arising in a sale and leaseback transaction in IFRS 16, while it does not change the accounting for leases unrelated to sale and leaseback transactions. In particular, the seller-lessee determines ‘lease payments’ or ‘revised lease payments’ in such a way that the seller-lessee would not recognise any amount of the gain or loss that relates to the right of use it retains. Applying these requirements does not prevent the seller-lessee from recognising, in profit or loss, any gain or loss relating to the partial or full termination of a lease. A seller-lessee applies the amendment retrospectively in accordance with IAS 8 to sale and leaseback transactions entered into after the date of initial application, being the beginning of the annual reporting period in which an entity first applied IFRS 16. • Amendments to IFRS 10 “Consolidated Financial Statements” and IAS 28 “Investments in Associates and Joint Ventures” - Sale or Contribution of Assets between an Investor and its Associate or Joint Venture and further amendments (effective date deferred indefinitely until the research project on the equity method has been concluded). o The amendments address an acknowledged inconsistency between the requirements in IFRS 10 and those in IAS 28, in dealing with the sale or contribution of assets between an investor and its associate or joint venture. The main consequence of the amendments is that a full gain or loss is recognized when a transaction involves a business (whether it is housed in a subsidiary or not). A partial gain or loss is recognized when a transaction involves assets that do not constitute a business, even if these assets are housed in a subsidiary. In December 2015 the IASB postponed the effective date of this amendment indefinitely pending the outcome of its research project on the equity method of accounting. The Bank anticipates that the adoption of these new standards, amendments to the existing standards and new interpretations will have no material impact on the financial statements of the Bank in the period of initial application. INTEGRATED ANNUAL REPORT 2022 210 OTP BANK IFRS REPORT (SEPARATE) NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Significant accounting policies applied in the preparation of the accompanying separate financial statements are summarized below: 2.1. Basis of presentation These separate financial statements have been prepared under the historical cost convention with the exception of certain financial instruments, which are recorded at fair value. Revenues and expenses are recorded in the period in which they are earned or incurred. The Bank does not offset assets and liabilities or income and expenses unless it is required or permitted by an IFRS standard. During the preparation of separate financial statements assets and liabilities, income and expenses are presented separately, except in certain cases, when one of the IFRS standards prescribes net presenting related to certain items. (See below 2.8.) The presentation of separate financial statements in conformity with IFRS requires the Management of the Bank to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as at the date of the financial statements and their reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Future changes in economic conditions, business strategies, regulatory requirements, accounting rules and other factors could result in a change in estimates that could have a material impact on future separate financial statements. 2.2. Foreign currency translation Monetary assets and liabilities denominated in foreign currencies are translated into HUF that is the presentation currency, at exchange rates quoted by the National Bank of Hungary ("NBH") as at the date of the separate financial statements. Income and expenses arising in foreign currencies are converted at the rate of exchange on the transaction date. Resulting foreign exchange gains or losses are recorded to the separate statement of profit or loss. 2.3. Consolidated financial statements These financial statements present the separate financial position and results of operations of the Bank. Consolidated financial statements are prepared by the Bank and consolidated net profit for the year and shareholders’ equity differs significantly from that presented in these separate financial statements. See Note 2.4 for the description of the method of accounting for investments in subsidiaries and associated companies in these separate financial statements. The consolidated financial statements and the separate financial statements will be published on the same date. 2.4. Investments in subsidiaries, associated companies and other investments Investments in subsidiaries comprise those investments where OTP Bank, through direct and indirect ownership interest, controls the investee. Control is achieved when the Bank has power over the investee, is exposed or has rights, to variable returns from its involvement with the investee and has the ability to use its power to affect its returns. Investments in subsidiaries are recorded at the cost of acquisition, less impairment for permanent diminution in value, when appropriate. After initial measurement investments in subsidiaries are measured at cost, in the case of foreign currency denominated investments for the measurement the Bank uses the exchange rate at the date of transaction. Impairment is determined based on the future economic benefits of the subsidiary and macroeconomic factors. OTP Bank calculates the fair value based on discounted cash flow model. The 3 year period explicit cash flow model serves as a basis for the impairment test by which the Bank defines the impairment need on investment in subsidiaries based on the strategic factors and financial data of its cash-generating units. OTP Bank in its strategic plan has taken into consideration the cautious recovery of global economic situation and outlook, the associated risks and their possible effect on the financial sector as well as the current and expected availability of wholesale funding. INTEGRATED ANNUAL REPORT 2022 211 OTP BANK IFRS REPORT (SEPARATE) NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES [continued] 2.5. Securities at amortised cost The Bank measures at amortized cost those securities which are held for contractual cash collecting purposes, and contractual terms of these securities give rise to cash flows that are solely payment of principal and interest on the principal amount outstanding. The Bank initially recognises these securities at fair value. Securities at amortised cost are subsequently measured using the effective interest (EIR) method and are subject to impairment. The amortisation of any discount or premium on the acquisition of a security at amortized cost is part of the amortized cost and is recognised as interest income so that the revenue recognized in each period represents a constant yield on the investment. Securities at amortized cost are accounted for on a trade date basis. Such securities comprise mainly securities issued by the Hungarian Government bonds and corporate bonds. 2.6. Financial assets at fair value through profit or loss 2.6.1. Securities held for trading Investments in securities are accounted for on a trade date basis and are initially measured at fair value. Securities held for trading are measured at subsequent reporting dates at fair value. Unrealised gains and losses on held for trading securities are recognized in profit or loss and are included in the separate statement of profit or loss for the period. The Bank holds held for trading securities within the business model to obtain short-term gains, consequently realised and unrealised gains and losses are recognized in the net operating income, while interest income is recognised in income similar to interest income. The Bank applies FIFO67 inventory valuation method for securities held for trading. Such securities consist of discounted and interest bearing Treasury bills, Hungarian Government bonds, mortgage bonds, shares in non-financial commercial companies, shares in investment funds, shares in venture capital funds and shares in financial institutions. 2.6.2. Derivative financial instruments In the normal course of business, the Bank is a party to contracts for derivative financial instruments, which represent a low initial investment compared to the notional value of the contract and their value depends on value of underlying asset and are settled in the future. The derivative financial instruments used include interest rate forward or swap agreements and currency forward or swap agreements and options. These financial instruments are used by the Bank both for trading purposes and to hedge interest rate risk and currency exposures associated with its transactions in the financial markets. (It is the so-called economic hedge, accounting hedge is described later.) Derivative financial instruments are accounted for on a trade date basis and are initially measured at fair value and at subsequent reporting dates also at fair value. Fair values are obtained from quoted market prices, discounted cash flow models and option pricing models as appropriate. OTP Bank adopts multi curve valuation approach for calculating the net present value of future cash flows – based on different curves used for determining forward rates and used for discounting purposes. It shows the best estimation of such derivative deals that are collateralised as OTP Bank has almost its entire open derivative transactions collateralised. Changes in the fair value of derivative financial instruments that do not qualify for hedge accounting are recognized in profit or loss and are included in the separate statement of profit or loss for the period. Each derivative deal is determined as asset when fair value is positive and as liability when fair value is negative. Certain derivative transactions, while providing effective economic hedges under risk management positions of the Bank, do not qualify for hedge accounting under the specific rules of IFRS 9 and are therefore treated as derivatives held for trading with fair value gains and losses charged directly to the separate statement of profit or loss. Foreign currency contracts Foreign currency contracts are agreements to exchange specific amounts of currencies at a specified rate of exchange, at a spot date (settlement occurs two days after the trade date) or at a forward date (settlement occurs more than two days after the trade date). The notional amount of forward contracts does not represent the actual market or credit risk associated with these contracts. Foreign currency contracts are used by the Bank for risk management and trading purposes. The Bank’s risk management foreign currency contracts were used to hedge the exchange rate fluctuations of loans and deposits denominated in foreign currency. 67 First In First Out INTEGRATED ANNUAL REPORT 2022 212 OTP BANK IFRS REPORT (SEPARATE) NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES [continued] 2.6.2 Derivative financial instruments [continued] Foreign exchange swaps and interest rate swaps The Bank enters into foreign-exchange swap and interest rate swap (“IRS”) transactions. The swap transaction is a complex agreement concerning the swap of certain financial instruments, which usually consists of a spot and one or more forward contracts. Interest rate swaps obligate two parties to exchange one or more payments calculated with reference to fixed or periodically reset rates of interest applied to a specific notional principal amount (the base of the interest calculation). Notional principal is the amount upon which interest rates are applied to determine the payment streams under interest rate swaps. Such notional principal amounts are often used to express the volume of these transactions but are not actually exchanged between the counterparties. The Bank’s interest rate swap contracts can be hedging or held for trading contracts. Cross-currency interest rate swaps The Bank enters into cross-currency interest rate swap (“CCIRS”) transactions which have special attributes, i.e. the parties exchange the notional amount at the beginning and also at the maturity of the transaction. A special type of these deals is the mark-to-market CCIRS agreements. At this kind of deals the parties – in accordance with the foreign exchange prices – revalue the notional amount during lifetime of the transaction. Equity and commodity swaps Equity swaps obligate two parties to exchange more payments calculated with reference periodically reset rates of interest and performance of indices. A specific notional principal amount is the base of the interest calculation. The payment of index return is calculated on the basis of current market price compared to the previous market price. In case of commodity swaps payments are calculated on the basis of the strike price of a predefined commodity compared to its average market price in a period. Forward rate agreements (“FRA”) A forward rate agreement is an agreement to settle amounts at a specified future date based on the difference between an interest rate index and an agreed upon fixed rate. Market risk arises from changes in the market value of contractual positions caused by movements in interest rates. The Bank limits its exposure to market risk by entering into generally matching or offsetting positions and by establishing and monitoring limits on unmatched positions. Credit risk is managed through approval procedures that establish specific limits for individual counter-parties. The Bank’s forward rate agreements were transacted for management of interest rate exposures. Foreign exchange options • A foreign exchange option is a derivative financial instrument that gives the owner the right to exchange money denominated in one currency into another currency at a pre-agreed exchange rate at a specified future date. The transaction, for a fee, guarantees a worst-case exchange rate for the futures purchase of one currency for another. These options protect against unfavourable currency movements while preserving the ability to participate in favourable movements. 2.7. Hedge accounting In the case of a financial instrument measured at amortised cost the Bank recognises the hedging gain or loss on the hedged item as the modification of its carrying amount and it is recognised in profit or loss. These adjustmets of the carrying amount are amortised to the profit or loss using the effective interest rate method. The Bank starts the amortisation when the hedged item is no longer adjusted by the hedging gains or losses. If the hedged item is derecognised, the Bank recognises the unamortised fair value in profit or loss immediately. Derivative financial instruments designated as fair value Changes in the fair value of derivatives that are designated and qualify as hedging instruments fair value hedges and that prove to be highly effective in relation to the hedged risk, are recorded in the separate statement of profit or loss along with the corresponding change in fair value of the hedged asset or liability that is attributable to the specific hedged risk. Changes in the fair value of the hedging instrument in fair value hedges are charged directly to the separate statement of profit or loss. The conditions of hedge accounting applied by the Bank are the following: formally designated as hedging relationship, proper hedge documentation is prepared, effectiveness test is performed and based on it the hedge is qualified as effective. INTEGRATED ANNUAL REPORT 2022 213 OTP BANK IFRS REPORT (SEPARATE) NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES [continued] 2.7. Hedge accounting [continued] Derivative financial instruments designated as fair value [continued] For the fair value hedges inefficiencies and the net revaluation of hedged and hedging item are recognised in the Net result on derivative instruments and hedge relationships. Derivative financial instruments designated as cash flow hedge Changes in fair value of derivatives that are designated and qualify as hedging instrument in cash flow hedges and that prove to be highly effective in relation to hedged risk are recognized as reserve in other comprehensive income. Amounts deferred in other comprehensive income are transferred to the separate statement of profit or loss and classified as revenue or expense in the periods during which the hedged assets and liabilities effect the separate statement of recognized and comprehensive income for the period. The ineffective element of the hedge is charged directly to the separate statement of profit or loss. The Bank terminates the hedge accounting if the hedging instrument expires or is sold, terminated, or exercised, or the hedge no longer meets the criteria for hedge accounting. In case of cash flow hedges - in line with the standard – hedge accounting is still applied as long as the underlying asset is derecognised or terminated. When the Bank discontinues hedge accounting to a cash-flow hedge the amount in the cash flow hedge reserve is reclassified to the profit or loss if the hedged future cash flows are no longer expected to occur. If the hedged future cash flows are still expected to occur, the amount remains in the cashflow hedge reserve and reclassified to the profit and loss only when the future cash flows occur. 2.7. Offsetting Financial assets and liabilities may be offset and the net amount is reported in the statement of financial position when the Bank has a legally enforceable right to set off the recognised amounts and the transactions are intended to be reported in the statement of financial position on a net basis. In the case of the derivative financial instruments the Bank applies offsetting and net presentation in the Statement of Financial Position when the Bank has the right and the ability to settle the assets and liabilities on a net basis. 2.8. Embedded derivatives Sometimes, a derivative may be a component of a combined or hybrid contract that includes a host contract and a derivative (the embedded derivative) affecting cash flows or otherwise modifying the characteristics of the host instrument. An embedded derivative must be separated from the host instrument and accounted for as a separate derivative if, and only if: - The economic characteristics and risks of the embedded derivative are not closely related to the economic characteristics and risks of the host contract; - A separate financial instrument with the same terms as the embedded derivative would meet the definition of a derivative as a stand-alone instrument; and - The host instrument is not measured at fair or is measured at fair value but changes in fair value are recognised in other comprehensive income. As long as a hybrid contract contains a host that is a financial asset the general accounting rules for classification, recognition and measurement of financial assets are applicable for the whole contract and no embedded derivative is separated. Derivatives that are required to be separated are measured at fair value at initial recognition and subsequently. If the Bank is unable to measure the embedded derivative separately either at acquisition or at the end of a subsequent financial reporting period, the Group shall designate the entire hybrid contract as at fair value through profit or loss. The Bank shall assess whether an embedded derivative is required to be separated from the host contract and accounted for as a derivative when the Bank first becomes a party to the contract. The separation rules for embedded derivatives are only relevant for financial liabilities. INTEGRATED ANNUAL REPORT 2022 214 OTP BANK IFRS REPORT (SEPARATE) NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES [continued] 2.9. Securities at fair value through other comprehensive income (“FVOCI securities”) FVOCI securities are held within a business model whose objective is achieved by both collecting of contractual cash flows and selling securities. Furthermore contractual terms of FVOCI securities give rise on specified dates to cash flows that are solely payment of principal and interest on the principal amount outstanding. Debt instruments Investments in debt securities are accounted for on a trade date basis and are initially measured at fair value. Securities at fair value through other comprehensive income are measured at subsequent reporting dates at fair value. Unrealised gains and losses on FVOCI financial instruments are recognized in other comprehensive income, except for interest and foreign exchange gains/losses on monetary items, unless such FVOCI security is part of an effective hedge. Such gains and losses will be reported when realised in profit or loss for the applicable period. The Bank applies FIFO68 inventory valuation method for FVOCI securities. For debt securities at fair value through other comprehensive income the loss allowance is calculated based on expected credit loss model. The expected credit loss is accounted for against Other Comprehensive Income. FVOCI securities are remeasured at fair value based on quoted prices or values derived from cash flow models. In circumstances where the quoted market prices are not readily available, the fair value of debt securities is estimated using the present value of the future cash flows and the fair value of any unquoted equity instruments are calculated using the EPS ratio. Fair value through other comprehensive income option for equity instruments In some cases the Bank made an irrevocable election at initial recognition for certain non-trading investments in an equity instrument to present subsequent changes in fair value of these securities in other comprehensive income instead of in profit or loss. The use of the fair value option is based only on direct decision of management of the Bank. 2.10. Loans, placements with other banks, repo receivables and loss allowance for loan, placements and repo receivables losses The Bank measures Loans, placements with other banks and repo receivables at amortised cost, which are held to collect contractual cash flows, and contractual terms of these assets give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding. The Bank recognises loans, which are not held for trading and do not give rise contractual cash flows that are solely payments of principal and interest on the principal amount outstanding as loans measured at fair value through profit or loss (“FVTPL loans”). Loans, placements with other banks and repo receivables are accounted at amortised cost, stated at the principal amounts outstanding including accrued interest, net of allowance for loan or placement losses, respectively. In case of the above mentioned financial assets measured at amortised cost transaction fees and charges adjust the carrying amount at initial recognition and are included in effective interest calculation. In case of FVTPL loans fees and charges are recognised when incurred in the separate statement of profit or loss. Loans, placements with other banks and repo receivables loans are derecognised when the contractual rights to the cash flows expire or they are transferred. When a financial asset is derecognised the difference of the carrying amount and the consideration received is recognised in the profit or loss. In case of the above mentioned financial assets at amortised cost gains or losses from derecognition are presented in “Gains/losses arising from derecognition of financial assets at amortised cost” line. In case of FVTPL loans gains or losses from derecognition are presented in “Net operating income”. Change in the fair value of FVTPL loans is broken down into two components and presented in the separate statement of profit or loss as follows: • Portion of the change in fair value arising from changes in credit risk are presented within “Risk cost” as “Change in the fair value attributable to changes in the credit risk of loans mandatorily measured at fair value through profit of loss”. • The remaining component of the change is presented in fair value within “Net operating income” as “Gains/(Losses) on financial instruments at fair value through profit or loss”. 68 First In First Out INTEGRATED ANNUAL REPORT 2022 215 OTP BANK IFRS REPORT (SEPARATE) NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES [continued] 2.11. Loans, placements with other banks, repo receivables and loss allowance for loan, placements and repo receivables losses [continued] Initially, financial assets shall be recognised at fair value which is usually equal to the transaction value in case of loans and placements. However, when the amounts are not equal, the initial fair value difference should be recognized. If the fair value of financial assets is based on a valuation technique using only inputs observable in market transactions, the Bank recognises the initial fair value difference in the Separate Statement of Profit or Loss. When the fair value of financial assets is based on models for which inputs are not observable, the difference between the transaction price and the fair value is deferred and only recognised in profit or loss when the instrument is derecognised or the inputs became observable. Initial fair value of loans lent at interest below market conditions is lower than their transaction price, the subsequent measurement of these loans is under IFRS 9. Allowance for losses on loans, placements with other banks and repo receivables represent management assessment for potential losses in relation to these activities. The Bank recognises a loss allowance for expected credit losses on a financial asset at each reporting date. The loss allowance for a financial asset equals to 12-month expected credit loss or equals to the lifetime expected credit losses. The maximum period over which expected credit losses shall be measured is the maximum contractual period over which the Bank is exposed to credit risk. If the credit risk on a financial asset has not increased significantly since initial recognition then 12-month expected credit losses, otherwise (in case of significant credit risk increase) lifetime expected credit losses should be calculated. The expected credit loss is the present value of the difference between the contractual cash flows that are due to the Bank under the contract and the cash flows that the Bank expects to receive. When the contractual cash flows of a financial asset are modified and the modification does not result in the derecognition of the financial asset the Bank recalculate the gross carrying amount of the financial asset by discounting the expected future cash flows with the original effective interest rate of the asset. The difference between the carrying amount and the present value of the expected cash flows is recognised as a “Modification gain or loss” in the statement of profit or loss. Interest income and amortised cost are accounted for using the effective interest rate method. Write-offs are generally recorded after all reasonable restructuring or collection activities have taken place and the possibility of further recovery is considered to be remote. The loan is written off against the related account “Loss allowance on loan, placement and repo receivables losses” in the Statement of Profit or loss. OTP Bank applies partial or full write-off for loans based on the definitions and prescriptions of financial instruments in accordance with IFRS 9. If OTP Bank has no reasonable expectations regarding a financial asset (loan) to be recovered, it will be written off partially or fully at the time of emergence. The gross amount and loss allowance of the loans shall be written off in the same amount to the estimated maximum recovery amount while the net carrying value remains unchanged. If there are reasonable expectations of recovery for a financial asset that is written-off fully or partially, OTP Bank shall re-estimate cash flows of a financial asset and write-off reversal is applied in the financial statements. INTEGRATED ANNUAL REPORT 2022 216 OTP BANK IFRS REPORT (SEPARATE) NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES [continued] 2.11. Loans, placements with other banks, repo receivables and loss allowance for loan, placements and repo receivables losses [continued] Modification of contractual cash flows If the net present value of the contracted cash flows changes due to the modification of the contractual terms and it is not qualified as derecognition, modification gain or loss should be calculated and accounted for in the separate statement of profit or loss. Modification gain or loss is accounted in cases like restructuring – as defined in internal policies of the Bank – prolongation, renewal with unchanged terms, renewal with shorter terms and prescribing capital repayment rate, if it doesn’t exist or has not been earlier. The changes of net present value should be calculated on portfolio level in case of retail exposures. Each retail contract is restructured based on restructuring frameworks. The Bank has to evaluate these frameworks (and not individual contracts). The changes of net present value should be calculated individually on contract level in case of corporate portfolio. Among the possible contract amendments, the Bank considers as a derecognition and a new recognition when the discounted present value – discounted at the original effective interest rate – of the cash flows under the new terms is at least 10 per cent different from the discounted present value of the remaining cash flows. In case of derecognition and new recognition the unamortised fees of the derecognised asset should be presented as Income similar to interest income. The newly recognised financial asset is initially measured at fair value and is placed in stage 1 if the derecognised financial asset was in stage 1 or stage 2 portfolio. The newly recognised financial asset will be purchased or originated credit impaired financial asset (“POCI”) if the derecognised financial asset was in stage 3 portfolio or it was POCI. The modification gain or loss shall be calculated at each contract amendments unless they are handled as a derecognition and new recognition. In case of modification the Bank recalculates the gross carrying amount of the financial asset. To do this, the new contractual cash flows should be discounted using the financial asset’s original effective interest rate (or credit-adjusted effective interest rate for POCI financial asset). Any costs or fees incurred adjust the carrying amount of the modified financial asset are amortized over the remaining term of the modified financial asset. Purchased or originated credit impaired financial assets Purchased or originated financial assets are credit-impaired on initial recognition. A financial asset is credit- impaired when one or more events that have a detrimental impact on the estimated future cash flows of that financial asset have occurred. A purchased credit-impaired asset is likely to be acquired at a deep discount. In unusual circumstances, it may be possible that an entity originates a credit-impaired asset, for example, following a substantial modification of a distressed financial asset that resulted in the derecognition of the original financial asset. In the case of POCI financial assets, interest income is always recognized by applying the credit-adjusted effective interest rate. For POCI financial assets, in subsequent reporting periods an entity is required to recognize: - - the cumulative changes in lifetime expected credit losses since initial recognition as a loss allowance, the impairment gain or loss which is the amount of any change in lifetime expected credit losses. An impairment gain is recognized (with the parallel increase of the net amortized cost of receivable) if due to the favourable changes after initial recognition the lifetime expected credit loss estimation is becoming lower than the original estimated credit losses at initial recognition. The POCI qualification remains from initial recognition to derecognition in the Bank’s books. INTEGRATED ANNUAL REPORT 2022 217 OTP BANK IFRS REPORT (SEPARATE) NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES [continued] 2.11. Loss allowance Loss Allowance for loans and placements with other banks and repo receivables are recognised by the Bank based on the expected credit loss model in accordance with IFRS 9. Based on the three stage model loss allowance is recognised in amount of 12 month expected credit loss from the initial recognition. Financial assets with significantly increased credit risk or credit impaired financial assets (based on objective evidences) loss allowance is recognised in amount of lifetime expected credit loss. In case of purchased or originated credit impaired financial assets loss allowance is recognised in amount of lifetime expected credit loss since initial recognition. Impairment gain is recognised if lifetime expected credit loss for purchased or originated credit impaired financial assets at measurement date are less than the estimated credit loss at initial recognition. Loss allowance for loan and placements are determined at a level that provides coverage for individually identified credit losses. Collective impairment loss is recognised for loans with similar credit risk characteristics when it is not possible to determine the amount of the individually identified credit loss in the absence of objective evidence. The expected cash flows for loan portfolios are estimated based on historical loss experience. At subsequent measurement the Bank recognises through “Loss allowance on loan, placement and repo receivables losses” in the Statement of Profit or Loss impairment gain or loss as an amount of expected credit losses or reversal that is required to adjust the loss allowance at the reporting date to the amount that is required to be recognised in accordance with IFRS 9. If a financial asset, which previously classified in the first stage, classified subsequently in the second or third stage than loss allowance is adjusted to lifetime expected credit loss. If a financial asset, which previously classified in the second or third stages, classified subsequently in the first stage than loss allowance is adjusted to level of 12 month expected credit loss. Classification into risk classes According to the requirements of the IFRS9 standard, the Bank classifies financial assets measured at amortised cost and fair value through other comprehensive income, and loan commitments and financial guarantees into the following categories in accordance with IFRS9: Stage 1 Stage 2 Stage 3 POCI Performing Performing, but compared to the initial recognition it shows significant increase in credit risk Non-performing Purchased or originated credit impaired In the case of trade receivables, contract assets and lease receivables the Group applies the simplified approach and calculates only lifetime expected credit loss. Simplified approach is the following: • • • • • • for the past 3 years the average annual balance of receivables under simplified approach is calculated, the written-off receivables under simplified approach are determined in the past 3 years, the loss allowance ratio will be the sum of the written-off amounts divided by the sum of the average balances, historical losses are adjusted to reflect information about current conditions and reasonable forecasts of future economic conditions, the loss allowance is multiplied by the end-of-year balance and it will be the actual loss allowance on these receivables, loss allowance should be recalculated annually. INTEGRATED ANNUAL REPORT 2022 218 OTP BANK IFRS REPORT (SEPARATE) NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES [continued] 2.12. Loss allowance [continued] Classification into risk classes [continued] The Bank assumes that the credit risk on a financial instrument has not increased significantly since initial recognition if the financial asset is determined to have low credit risk at the reporting date. This might occur if the financial asset has a low risk of default, the borrower has a strong capacity to meet its contractual cash flow obligations in the near term and adverse changes in economic and business conditions in the longer term may, but will not necessarily, reduce the ability of the borrower to fulfil its contractual cash flow obligations. The Bank considers souvereign exposures having low credit risk. Credit risk of financial assets increases significantly at the following conditions: • • • • • • • the payment delay exceeds 30 days, it is classified as performing forborne, based on individual decision, its currency suffered a significant "shock" since the disbursement of the loan, the transaction/client rating exceeds a predefined value or falls into a determined range, or compared to the historic value it deteriorates to a predefined degree, in the case household mortgage loans, the loan-to-value ratio (“LTV”) exceeds a predefined rate, default on another loan of the retail client, if no cross-default exists, in case of corporate and municipal clients: financial difficulty (capital requirements, liquidity, impairment of asset quality), significant decrease of activity and liquidity in the market of the asset, client’s rating reflects higher risk, but better than default, collateral value drops significantly, from which the client pays the loan, o o o o o more than 50% decrease in owner’s equity due to net losses, o o negative information from Central Credit Information System: the payment delay exceeds 30 client under dissolution, days Financial assets classifies as non-performing, if the following conditions are met: • • • default, non-performing forborne exposures, in case of corporate and municipal clients: o breach of contract terms and conditions o critical financial difficulty of the client (capital requirements, liquidity, impairment of asset quality), liquidation, dissolution or debt clearing procedures against client, forced deregistration procedures from company registry, terminated loans by the Bank, in case of fraud, o o o o o negative information from Central Credit Information System: the payment delay exceeds 90 days, cessation of active markets of the financial asset, o o default of ISDA based contracts. For lifetime expected credit losses, the Bank shall estimate the risk of a default occurring on the financial instrument during its expected life. 12-month expected credit losses are a portion of the lifetime expected credit losses and represent cash flow shortfalls that will result if a default occurs in the 12 months after the reporting date (or a shorter period fi the expected life of the financial instrument is less than 12 months), weighted by the probability of that default occurring. Expected credit losses are measured in a way that reflects: • • an unbiased and probability-weighted amount that is determined by evaluating a range of possible outcomes, the time value of money, and reasonable and supportable information that is available without undue cost of effort at the reporting date about past events, current conditions and forecasts of future economic conditions. INTEGRATED ANNUAL REPORT 2022 219 OTP BANK IFRS REPORT (SEPARATE) NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES [continued] 2.12. Option to designate a financial asset/liability measured at fair value through profit or loss (FVTPL option) The Bank may, at initial recognition, irrevocably designate a financial asset or liability as measured at fair value through profit or loss. The Bank may use FVTPL option in the following cases: - - if doing so eliminates or significantly reduces a measurement or recognition inconsistency (accounting mismatch) that would otherwise arise from measuring assets or liabilities or recognising the gains and losses on them on different bases if the group of financial liabilities or assets is managed and its performance is evaluated on a fair value basis, in accordance with a documented risk management or investment strategy, and information about the group is provided internally on that basis to the Bank’s key management personnel. The use of the fair value option is limited only to special situations, and it can be based only on direct decision of management of the Bank. 2.13. Sale and repurchase agreements, security lending Where debt or equity securities are sold under a commitment to repurchase them at a pre-determined price, they remain on the statement of financial position and the consideration received is recorded in Other liabilities or Amounts due to banks and deposits from the National Bank of Hungary and other banks, or Deposits from customers. Conversely, debt or equity securities purchased under a commitment to resell are not recognized in the statement of financial position and the consideration paid is recorded either in Placements with other banks or Deposits from customers. Interest is accrued evenly over the life of the repurchase agreement. In the case of security lending transactions the Bank does not recognize or derecognize the securities because it is believed that the transferor retains substantially all the risks and rewards of the ownership of the securities. Only a financial liability or financial receivable is recognized for the consideration amount. 2.14. Property, equipment and intangible assets Property, equipment and intangible assets are stated at cost, less accumulated depreciation and amortization and impairment, if any. The depreciable amount (book value less residual value) of the non-current assets must be allocated over their useful lives. Depreciation and amortization are calculated using the straight-line method over the estimated useful lives of the assets based on the following annual percentages: Intangible assets Software Property rights Property Office equipment and vehicles 20-33.3% 16.7-33.3% 1-2% 9-33.3% Depreciation and amortization on properties, equipment and intangible assets starts on the day when such assets are placed into service. At each balance sheet date, the Bank reviews the carrying value of its tangible and intangible assets to determine if there is any indication that those assets have suffered an impairment loss. If such indication exists, the recoverable amount of the asset is estimated to determine the extent (if any) of the impairment loss. Where it is not possible to estimate the recoverable amount of an individual asset, the Bank estimates the recoverable amount of the cash-generating unit to which the asset belongs. Where the carrying value of property, equipment, other tangible fixed assets and intangible assets is greater than the estimated recoverable amount, it is impaired immediately to the estimated recoverable amount. 2.15. Inventories The inventories shall be measured at the lower of cost and net realisable value. The cost of inventories shall comprise all costs of purchase, costs of conversion and other costs incurred in bringing the inventories to their present location and condition. The Bank uses generally FIFO formulas to the measurement of inventories. Inventories shall be removed from books when they are sold, unusable or destroyed. When inventories are sold, the carrying amount of those inventories shall be recognized as an expense in the period in which the related revenue is recognized. Repossessed assets are classified as inventories. INTEGRATED ANNUAL REPORT 2022 220 OTP BANK IFRS REPORT (SEPARATE) NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES [continued] 2.16. Investment properties Investment properties of the Bank are land, buildings, part of buildings which are held (as the owner or as the lessee under a finance lease) to earn rentals or for capital appreciation or both, rather than for use in the production or supply of services or for administrative purposes or sale in the ordinary course of business. The Bank measures the investment properties at cost less accumulated depreciation and impairment, if any. The depreciable amount (book value less residual value) of the investment properties must be allocated over their useful lives. Depreciation and amortization are calculated using the straight-line method over the estimated useful lives of the assets based on the 1-2% annual percentages. The fair value of the investment properties is established mainly by external experts. According to the opinion of the Management there is no significant difference between the fair value and the carrying value of these properties. 2.17. Financial liabilities The financial liabilities are presented within financial liabilities at fair value through profit or loss or financial liabilities measured at amortised cost. In connection to the financial liabilities at fair value through profit or loss, the Bank presents the amount of change in their fair value originated from the changes of market conditions and business environment. Financial liabilities at fair value through profit or loss are either financial liabilities held for trading or they are designated upon initial recognition as at fair value through profit or loss. In the case of financial liabilities measured at amortised cost, fees and commissions related to the origination of the financial liability are recognised through profit or loss during the maturity of the instrument. In certain cases the Bank repurchases a part of financial liabilities (mainly issued securities or subordinated bonds) and the difference between the carrying amount of the financial liability and the amount paid for it is recognised in the statement of profit or loss and included in other operating income. 2.18. Leases An agreement is a lease or contains a lease if it transfers the rights to control the use of an identified asset for a given period in exchange for compensation. Expenses related to the use of lease assets, the majority of which were previously recognised in external services costs, will be currently classified as depreciation/amortisation and interest costs. Usufruct rights are depreciated using a straight line method, while lease liabilities are settled using an effective discount rate. Recognition of lease liabilities The Bank will recognise lease liabilities related to leases which were previously classified as "operating leases" in accordance with IAS 17 Leases. These liabilities will be measured at the present value of lease payments receivable as at the date of commencement of the application of IFRS 16. Lease payments shall be discounted using the interest rate implicit in the lease or, if that rate cannot be readily determined, the incremental borrowing rate. Interest rate applied by the Bank: weighted average lessee’s incremental borrowing rate: ~1,62% At their date of initial recognition, lease payments contained in the measurement of lease liabilities comprise the following types of payments for the right to use the underlying asset for the life of the lease: - - - - - fixed lease payments less any lease incentives, variable lease payments which are dependent on market indices, amounts expected to be payable by the lessee under residual value guarantees, the strike price of a purchase option, if it is reasonably certain that the option will be exercised, and payment of contractual penalties for terminating the lease, if the lease period reflects that the lessee used the option of terminating the lease. The Bank makes use of expedients with respect to short-term leases (less than 12 months) as well as in the case of leases in respect of which the underlying asset has a low value (less than HUF 1.4 million) and for which agreements it will not recognise financial liabilities nor any respective right-of-use assets. These types of lease payments will be recognised as costs using the straight-line method during the life of the lease. INTEGRATED ANNUAL REPORT 2022 221 OTP BANK IFRS REPORT (SEPARATE) NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES [continued] 2.20. Leases [continued] Recognition of right-of-use assets Right-of-use assets are initially measured at cost. The cost of a right-of-use asset comprises: - - - - the amount of the initial measurement of lease liabilities, any lease payments made at or before the commencement date, less any lease incentives received, any initial direct costs incurred by the lessee, estimates of costs to be incurred by the lessee as a result of an obligation to disassemble and remove an underlying asset or to carry out renovation/restoration. Right-of-use assets are presented separately in the financial statements. 2.20. Share capital Share capital is the capital determined in the Articles of Association and registered by the Budapest-Capital Regional Court. Share capital is the capital the Bank raised by issuing common stocks at the date the shares were issued. The amount of share capital has not changed over the current period. 2.21. Treasury shares Treasury shares are shares which are purchased on the stock exchange and the over-the-counter market by the Bank and are presented in the separate statement of financial position at acquisition cost as a deduction from shareholders’ equity. Gains and losses on the sale of treasury shares are recognised directly to shareholder’s equity. Derecognition of treasury shares is based on the FIFO method. 2.22. Interest income, income similar to interest income and interest expense Interest income and expenses are recognised in profit or loss in the period to which they relate, using the effective interest rate method. For exposures categorized into stage 1 and stage 2 the interest income is recognized on a gross basis. For exposures categorized into stage 3 (using effective interest rate) and for POCI (using credit-adjusted effective interest rate) the interest income is recognized on a net basis. The time-proportional income similar to interest income of derivative financial instruments calculated without using the effective interest method and the positive fair value adjustment of interest rate swaps are also included in income similar to interest income. Interest income of FVTPL loans is calculated based on interest fixed in the contract and presented in “Income similar to interest income” line. Interest from loans and deposits are accrued on a daily basis. Interest income and expense include certain transaction cost and the amortisation of any discount and premium between the initial carrying amount of an interest-bearing instrument and its amount at maturity calculated on an effective interest rate basis. All interest income and expense recognised are arising from loans, placements with other banks, repo receivables, securities at fair value through other comprehensive income, securities at amortised cost, and amounts due to banks, repo liabilities, deposits from customers, liabilities from issued securities, subordinated bonds and loans are presented under these lines of financial statements 2.23. Fees and Commissions Fees and commissions that are not involved in the amortised cost model are recognised in the Separate Statement of Profit or Loss on an accrual basis according to IFRS 15. These fees are related to deposits, cash withdrawal, security trading, bank card, etc. The Bank recognise income if performance obligations related to the certain goods or service are satisfied, performed, and control over the asset is transferred to the customer, and it is probable that consideration payable will probably flow to the entity. In case of those service, where the Bank transfer control over the asset continuously, income is recognised on accrual basis. (For more details see note 31) The Bank provides foreign exchange trading services to its customers, the profit margin achieved on these transactions is presented as Net profit from fees and commissions in the Separate Statement of Profit or Loss. INTEGRATED ANNUAL REPORT 2022 222 OTP BANK IFRS REPORT (SEPARATE) NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES [continued] 2.24. Dividend income Dividend income refers to any distribution of entity’s earnings to shareholders from stocks or mutual funds that is owned by the Bank. The Bank recognizes dividend income in the separate financial statements when its right to receive the payment is established. 2.25. Income tax The Bank considers corporate income tax and local business tax and the innovation contribution as income tax in Hungary. The annual taxation charge is based on the tax payable under Hungarian fiscal law, adjusted for deferred taxation. Deferred taxation is accounted for using the balance sheet liability method in respect of temporary differences between the tax bases of assets and liabilities and their carrying value for financial reporting purposes, measured at the tax rates that are expected to apply when the asset is realised or the liability is settled. Deferred tax assets and liabilities are presented in a net way in the statement of financial position. Current tax asset or current tax liability is presented related to income tax and innovation contribution separately in the statement of financial position. Deferred tax assets are recognized by the Bank for the amounts of income tax that are recoverable in future periods in respect of deductible temporary differences as well as the carry forward of unused tax losses and the carryforward of unused tax credits. The Bank recognizes a deferred tax asset for all deductible temporary differences arising from investments in subsidiaries, branches and associates, and interests in joint arrangements, to the extent that, and only to the extent that, it is probable that: - the temporary difference will reverse in the foreseeable future; and - taxable profit will be available against which the temporary difference can be utilised. The Bank considers the availability of qualifying taxable temporary differences and the probability of other future taxable profits to determine whether future taxable profits will be available. The Bank recognizes a deferred tax liability for all taxable temporary differences associated with investments in subsidiaries, branches and associates, and interests in joint arrangements, except to the extent that both of the following conditions are satisfied: - - the Bank is able to control the timing of the reversal of the temporary difference, and it is probable that the temporary difference will not reverse in the foreseeable future. The Bank only offsets its deferred tax liabilities against deferred tax assets when: - - there is a legally enforceable right to set-off current tax liabilities against current tax assets, and the taxes are levied by the same taxation authorities on either the same taxable entity or • • different taxable entities which intend to settle current tax liabilities and assets on a net basis. 2.26. Banking tax The Bank is obliged to pay banking tax based on Act LIX of 2006. As the calculation is not based on the taxable profit (but the adjusted Assets total calculated based on the Separate Financial Statements for the second period preceding the current tax year), banking tax is not considered as income tax. Therefore, the banking tax is considered as an other administrative expense, not as income tax. Pursuant to Government Decree No. 197/2022 published on 4 June 2022, the Hungarian Government decided to impose a windfall tax on credit institutions and financial enterprises temporarily, that is for 2022 and 2023. As for 2022, the base of the windfall tax is the net revenues based on the 2021 financial statements, calculated according to local tax law, whereas the tax rate is 10%. INTEGRATED ANNUAL REPORT 2022 223 OTP BANK IFRS REPORT (SEPARATE) NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES [continued] 2.27. Off-balance sheet commitments and contingent liabilities, provisions In the ordinary course of its business, the Bank has entered into off-balance sheet commitments such as guarantees, commitments to extend credit, letters of credit and transactions with financial instruments. The provision on off- balance sheet commitments and contingent liabilities is maintained at a level adequate to absorb probable future losses which are probable and relate to present obligations. Those commitments and contingent liabilities Management determines the adequacy of the provision based upon reviews of individual items, recent loss experience, current economic conditions, the risk characteristics of the various categories of transactions and other pertinent factors. The Bank recognizes a provision for off-balance sheet commitment and contingent liabilities in accordance with IAS 37 when it has a present obligation as a result of a past event; it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation; and a reliable estimate can be made of the obligation. Expected credit loss model is applied for given financial guarantees and loan commitments which are under IFRS 9 the, when the provision is calculated (see more details in Note 2.12.). After initial recognition the Group subsequently measures those contracts at a higher of the amount of the loss allowance or of the amount initially recognised less the cumulative amount of income recognized in accordance with IFRS 15. 2.28. Share-based payment and employee benefits The Bank has applied the requirements of IFRS 2 Share-based Payment. The Bank issues equity-settled share-based payments to certain employees. Equity-settled share-based payments are measured at fair value at the grant date. The fair value determined at the grant date of the equity-settled share- based payments is expensed on a straight-line basis over the year, based on the Bank’s estimate of shares that will eventually vest. Fair value is measured by use of a binomial model. The expected life used in the model has been adjusted, based on Management’s best estimate, for the effects of non-transferability, exercise restrictions, and behavioural considerations. The Bank has applied the requirement of IAS 19 Employee Benefits. The Bank’s short-term employee benefits are wages, salaries and bonuses, premium, paid annual leave and paid sick leave and other free services (health care, reward holiday). Short-term employee benefits are expected to pay by the Bank within 12 month. These benefits are recognised as an expense and liability undiscounted in the separate financial statements. Long-term employee benefits are mostly the jubilee reward. Long-term employee benefits are recognised as an expense and liability in the separate financial statements. Liabilities are regularly remeasured. Gains or losses due to the remeasurement are recognised in the separate statement of profit or loss. INTEGRATED ANNUAL REPORT 2022 224 OTP BANK IFRS REPORT (SEPARATE) NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES [continued] 2.29. Separate statement of cash flows Cash flows arising from the operating, investing or financing activities are reported in the Statement of Cash- Flows of the Bank primarily on a gross basis. Net basis reporting are applied by the Bank in the following cases: ▪ when the cash flows reflect the activities of the customer rather than those of the Bank, and ▪ for items in which the turnover is quick, the amounts are large, and the maturities are short. For the purposes of reporting cash flows “Cash, due from banks and balances with the NBH” line item excluding compulsory reserve are considered as cash and cash equivalents by the Bank. This line item shows balances of HUF and foreign currency cash amounts, and sight depos from NBH and from other banks, furthermore balances of current accounts. Cash flows from hedging activities are classified in the same category as the item being hedged. The unrealised gains and losses from the translation of monetary items to the closing foreign exchange rates and the unrealised gains and losses from derivative financial instruments are presented separately net in the statement of cash flows for the monetary items which have been revaluated. 2.30. Segment reporting IFRS 8 Operating Segments requires operating segments to be identified on the basis of internal reports about components of the Bank that are regularly reviewed by the chief operating decision maker in order to allocate resources to the segments and to assess their performance. At separate level, the Management does not separate and makes decisions based on different segments; the segments are identified by the Bank only at consolidated level in line with IFRS 8 paragraph 4. At Group level the segments identified by the Bank are the business and geographical segments. The Group’s operating segments under IFRS 8 are therefore as follows: OTP Core Hungary, Russia, Ukraine, Bulgaria, Romania, Serbia, Croatia, Montenegro, Albania, Moldova, Slovenia, Merkantil Group, Asset Management subsidiaries, other subsidiaries, Corporate Centre. 2.31. Comparative figures These separate financial statements are prepared in accordance with the same accounting policies in all respects as the Financial Statements prepared in accordance with IFRS as adopted by the EU for the year ended 31 December 2021 INTEGRATED ANNUAL REPORT 2022 225 OTP BANK IFRS REPORT (SEPARATE) NOTE 3: SIGNIFICANT ACCOUNTING ESTIMATES AND DECISIONS IN THE APPLICATION OF ACCOUNTING POLICIES The presentation of separate financial statements in conformity with IFRS requires the Management of the Bank to make judgements about estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as at the date of the financial statements and their reported amounts of revenues and expenses during the reporting period. The estimates and associated assumptions are based on expected loss and other factors that are considered to be relevant. The estimates and underlying assumptions are reviewed on an on-going basis. Revisions to accounting estimates are recognized in the period. Actual results could differ from those estimates. Significant areas of subjective judgements include: 3.1. Loss allowance on financial instruments The Bank regularly assesses its financial instruments for impairment. Management determines the adequacy of the allowances based upon reviews of individual loans and placements, recent loss experience, current economic conditions, the risk characteristics of the various categories of loans and other pertinent factors. The use of a new, three stage model was implemented for IFRS 9 purposes. The new impairment methodology is used to classify financial instruments in order to determine whether credit risk has significantly increased since initial recognition and able to identify credit-impaired assets. For instruments with credit-impairment or significant increase of credit risk lifetime expected losses will be recognized. (For details see note 36.1.1.) 3.2. Valuation of instruments without direct quotations Financial instruments without direct quotations in an active market are valued using the valuation model technique. The models are regularly reviewed and each model is calibrated for the most recent available market data. While the models are built only on available data, their use is subject to certain assumptions and estimates (e.g. for correlations, volatilities, etc). Changes in the model assumptions may affect the reported fair value of the relevant financial instruments. IFRS 13 Fair Value Measurement seeks to increase consistency and comparability in fair value measurements and related disclosures through a 'fair value hierarchy'. The hierarchy categorises the inputs used in valuation techniques into three levels. The hierarchy gives the highest priority to (unadjusted) quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The Bank evaluates the levelling at each reporting period on an instrument-by-instrument basis and reclassifies instruments when necessary, based on the facts at the beginning of the reporting period. The objective of a fair value measurement is to estimate the price at which an orderly transaction to sell the asset or to transfer the liability would take place between market participants at the measurement date under current market conditions. 3.3. Provisions Provision is recognised and measured for commitments to extend credit and for warranties arising from banking activities based on IFRS 9 Financial Instruments. Provision for these instruments is recognised based on the credit conversion factor, which shows the proportion of the undrawn credit line that will be probably drawn. Other provision is recognised and measured based on IAS 37 Provisions, Contingent Liabilities and Contingent Assets. The Bank is involved in a number of ongoing legal disputes. Based upon historical experience and expert reports, the Bank assesses the developments in these cases, and the likelihood and the amount of potential financial losses which are appropriately provided for. (See Note 24.) Other provision for off-balance sheet items includes provision for litigation, provision for retirement and expected liabilities and provision for Confirmed letter of credit. A provision is recognised by the Bank when it has a present obligation as a result of a past event, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation, and a reliable estimate can be made of the amount of the obligation. INTEGRATED ANNUAL REPORT 2022 226 OTP BANK IFRS REPORT (SEPARATE) NOTE 3: SIGNIFICANT ACCOUNTING ESTIMATES AND DECISIONS APPLICATION OF ACCOUNTING POLICIES [continued] IN THE 3.4. Business models A business model refers how the Bank manages its financial instruments in order to generate cash flows. It is determined at a level that reflects how groups of financial instruments are managed rather than at an instrument level. The financial assets held by the Bank are classified into three categories depending on the business model within the financial assets are managed. • Business model whose objective is to hold financial assets in order to collect contractual cash flows. Some sales can be consistent with hold to collect business model and the Bank assesses the nature, frequency and significance of any sales occurring. The Bank does not consider the sale frequent when at least six months have elapsed between sales. The significant sales are those when the sales exceed 2% of the total hold to collect portfolio. Within this business model the Bank manages mainly loans and advances and long term securities and other financial assets. • Business model whose objective is achieved by both collecting contractual cash flows and selling financial assets. Within this business model the Bank only manages securities. • Business model whose objective is to achieve gains in a short term period. Within this business model the Bank manages securities and derivative financial instrument. If cash flows are realised in a way that is different from the expectations at the date that the Bank assessed the business model, that does not give rise to a prior error in the Bank’s financial statements nor does it change the classification of the remaining financial assets held in that business model. When, and only when the Bank changes its business model for managing financial assets it reclassifies all affected assets. Such changes are determined by the Bank’s senior management as a result of external or internal changes and must be significant to the Bank’s operations and demonstrable to external parties. The Bank shall not reclassify any financial liability. 3.5. Contractual cash-flow characteristics of financial assets Classification of a financial asset is based on the characteristics of its contractual cash flows if the financial asset is held within a business model whose objective is to hold assets to collect contractual cash flows or within a business model whose objective is achieved by both collecting contractual cash flows and selling financial assets. The Bank should determine whether the asset’s contractual cash flows are solely payments of principal and interest on the principal amount outstanding (SPPI test). Contractual cash flows that are solely payments of principal and interest on the principal amount outstanding are consistent with a basic lending arrangement. Contractual terms that introduce exposure to risks or volatility in the contractual cash flows that is unrelated to a basic lending arrangement, such as exposure to changes in equity prices or commodity prices, do not give rise to contractual cash flows that are solely payments of principal and interest on the principal amount outstanding. The Bank assesses whether contractual cash flows are solely payments of principal and interest on the principal amount outstanding for the currency in which the financial asset is denominated. Time value of money is the element of interest that provides consideration for only the passage of time. However, in some cases, the time value of money element may be modified. In such cases, the Bank assesses the modification to determine whether the contractual cash flows represent solely payments of principal and interest on the principal amount outstanding. When assessing a modified time value of money element, the objective is to determine how different the undiscounted contractual cash flows could be from undiscounted cash flows that would arise if the time value of money element was not modified (the benchmark cash flows). The benchmark instrument can be an actual or a hypothetical financial asset. If the undiscounted contractual cash flows significantly – above 2% – differ from the undiscounted benchmark cash flows, the financial asset should be subsequently measured at fair value through profit or loss. INTEGRATED ANNUAL REPORT 2022 227 OTP BANK IFRS REPORT (SEPARATE) NOTE 4: MACRO-ENVIRONMENT, IMPACT OF ECONOMIC SITUATION ON THE BANK The Covid-19 pandemic and the volatile economic environment in the post-Covid-19 era Since the outbreak of the COVID-19 pandemic, OTP Group has regularly updated its forecasts in light of the pandemic and the impact of the pandemic on the operations of OTP Group. However, the continuance of new waves of the pandemic emerging may require further revision by OTP Group to such macroeconomic scenarios and its estimations of credit impairments. Over the last 2 years, the COVID-19 pandemic severely impacted the evolution of the global economy. The supply- chain and logistic relationships were disrupted by periodic lockdowns and social distancing requirements and the supply of several key raw materials dropped significantly, leading to a more volatile economic environment compared to previous years. Raw material and energy prices rose steeply, leading to higher inflation and interest rates in some of OTP Group’s operating countries. The conflict between Russian and Ukraine and the subsequent implementation of sanctions on Russia have accelerated supply shortages and resulted in higher energy prices and more broad-based inflation. Several major central banks have already raised or are considering raising interest rates earlier than previously expected. The Hungarian central bank has already hiked rates since the summer of 2021. The risk of local currency devaluations versus EUR or USD has increased and could lead to a more volatile operating environment for OTP Group. This volatile environment could cause financial difficulties for OTP Group’s customers. The deteriorating credit quality of OTP Group’s customers may in particular result in increasing defaults and arrears in monthly payments on loans, higher credit impairments on the loan portfolios of OTP Group. Furthermore, lower demand for, and origination of, new loans could have a material adverse effect on the OTP Group’s results of operations. The OTP Group’s activities and the profitability of its operations are strongly affected by the macroeconomic environment and the domestic and international perception of the economies in which it operates. Furthermore, the OTP Group relies on models to support a broad range of business and risk management activities, including informing business decisions and strategies, measuring and limiting risk, valuing exposures, conducting stress testing and assessing capital adequacy. Models are, by their nature, imperfect and incomplete representations of reality because they rely on assumptions and inputs, and as such assumptions may later potentially prove to be incorrect, this can affect the accuracy of their outputs. This may be exacerbated when dealing with unprecedented scenarios, due to the lack of reliable historical reference points and data. Any and all such events mentioned above could have a material adverse effect on the OTP Group’s business, financial condition, results of operations, prospects, liquidity, capital position and credit ratings, as well as on the OTP Group’s customers, employees and suppliers. Macro economy and financial situation Hungary The rapid recovery following the Covid crisis has created capacity bottlenecks in many sectors, which, coupled with rising commodity and energy prices, have significantly increased inflation in advanced economies. In the USA, the rate of inflation has not been at this level since the 1970s. The rapidly rising and increasingly broad- based inflation prompted the Fed to take action and to become the first major central bank to start raising interest rates. This move has significantly strengthened the dollar, and US 10-year yields rose to 4.3%. In the USA, inflation clearly peaked in mid-2022, and has been on a downward trend since then. Inflation also rose rapidly in Europe, where the dramatically growing gas and electricity prices posed the bigger problem. However, inflation also peaked in the euro area by the end of 2022, and has been on a downward trend since October 2022. As the Russia-Ukraine war had a much stronger impact on Europe’s economic outlook, and the labour market was much less tight than in the USA, the ECB was slower to react to the rise in inflation. Still, European short-term interest rates also rose to 2% by the end of 2022. The USA went into a technical recession in the first half of 2022, but this turned out to be temporary, and the US economy resumed growth in the second half-year. Europe’s economies proved more resilient than had been expected to the effects of the Russia-Ukraine war. In the first half of the year, growth benefited from the sectors that recovered after the pandemic, but the currency area also avoided recession in the second half of the year, and grew by 3.5% in full year 2022. INTEGRATED ANNUAL REPORT 2022 228 OTP BANK IFRS REPORT (SEPARATE) NOTE 4: MACRO-ENVIRONMENT, IMPACT OF ECONOMIC SITUATION ON THE BANK [continued] Macro economy and financial situation [continued] Hungary [continued] The main factor that affected Hungary’s economy in 2022 was the war in a neighbouring country. Although the Hungarian economy grew by 8.2% year-on-year in the first quarter and by 6.5% in the second, this was largely fuelled by massive one-off transfers at the beginning of 2022. By the second half of the year, however, the economy had lost steam and entered technical recession (two consecutive quarters of economic contraction) by the end of 2022. As a result, the Hungarian economy grew by 4.6% in 2022 as a whole. Inflation, which went beyond 20% by the end of the year, played a significant role in the downturn, significantly eroding real income, and turning its growth negative by the end of 2022. The strong domestic demand at the beginning of the year allowed businesses to pass through the ongoing cost shocks to prices. From the second half of the year, a number of administrative measures (tightening of KATA tax rules, windfall taxes, increasing the public heath product tax, scrapping some price caps, etc.) also boosted inflation. As a consequence, Hungary’s inflation decoupled from the developments in the euro area, where inflation peaked around 10%, and from the CEE region, where it peaked at 15-17%. In Hungary, inflation did not peak in 2022. Given that Hungary is a major net energy importer, the sharp rise in energy prices has significantly worsened the Hungarian economy’s external balance, which put the forint under depreciation pressure. In addition, the continued delay in agreeing on EU funds has increased the risk premium on HUF assets, which also contributed to the forint’s weakening – the MNB could reverse this only by a drastic interest rate hike, when the HUF/EUR was nearing 435. As a result, the effective reference rate rose to 18%. The falling gas prices, and the agreement reached with the EU at the end of 2022 had a benign effect on the HUF’s exchange rate. Falling real incomes and high interest rates have considerably slowed credit market growth. The housing loan market saw the sharpest slowdown: by the end of 2022 (as the Green Home Programme credit line ended), the contracted amount had fallen to half of the level seen in 2021. Despite the rapidly eroding real incomes, household consumption was still relatively buoyant. But this came at a price: households’ ability to save has sharply fallen. Outflows from demand deposits was particularly strong; these amounts flowed into foreign currency deposits and investment fund units. The principles used in the preparation of the Separate Statement of Financial Position as at 31 December 2022 in connection with the evaluation of Russian and Ukrainian exposures Going concern principle Russia launched an operation against Ukraine on February 24, 2022, which has not ended even as of the date of these Consolidated Financial Statements. Because of the armed conflict, many countries and the European Union have imposed sanctions against Russia, Russian companies and citizens in several rounds. Russia responded to these sanctions with similar sanctions measures. Armed conflict and international sanctions significantly affect business and economic activity worldwide. Under an unexpected and extremely negative scenario of deconsolidating the Ukrainian entity and writing down the outstanding gross intragroup exposures as well, the effect for the consolidated CET1 ratio would be +1 bp, whereas in the case of Russia the impact would be -71 bps, based on the end of December 2022 numbers. OTP Group’s Ukrainian operation incorporates the Ukrainian bank, as well as the leasing and factoring companies. The country-consolidated Ukrainian total assets represented HUF 1,049 billion at the end of 2022 (3.2% of total consolidated assets), while net loans comprised HUF 414 billion (2.2% of consolidated net loans) and shareholders’ equity HUF 122 billion (3.7% of the consolidated total equity). At the end of 2022 the gross intragroup funding towards the Ukrainian operation represented HUF 84 billion. In 2022 the Ukrainian operation posted an adjusted after-tax loss of HUF 15.9 billion. Regarding the trajectory of the quarterly results, following the loss of HUF 34.4 billion realized in the first quarter, the financial performance of the Ukrainian operation stabilized: in the second quarter around break-even result, then both in the third and the fourth quarter a positive result was achieved. INTEGRATED ANNUAL REPORT 2022 229 OTP BANK IFRS REPORT (SEPARATE) NOTE 4: MACRO-ENVIRONMENT, IMPACT OF ECONOMIC SITUATION ON THE BANK [continued] The principles used in the preparation of the Separate Statement of Financial Position as at 31 December 2022 in connection with the evaluation of Russian and Ukrainian exposures [continued] Going concern principle [continued] The total assets of the Group’s Russian operation represented HUF 1,030 billion at the end of 2022 (3.1% of consolidated total assets), while net loans comprised HUF 612 billion (3.3% of consolidated net loans) and shareholders’ equity HUF 306 billion (9.2% of consolidated total equity). As the Russian subsidiary repaid its maturing intragroup loans in the fourth quarter of 2022, the gross intragroup funding towards the Russian operation declined from HUF 75 billion equivalent at the end of 2021 to HUF 10 billion equivalent at the end of 2022 (these figures are practically the same as the net group funding due to the lack of deposits placement by Russia in the Group). The remaining intragroup exposure toward the Russian operation at the end of 2022 was a subordinated loan.The Russian operation posted HUF 42.5 billion adjusted profit in 2022. Within that, HUF 27.2 billion loss was suffered in the first quarter, followed by profitable quarters in the remaining part of the year. In the case of Ukraine and Russia OTP management applies a „going concern” approach, however in Russia the management is still considering all strategic options, though a Russian Presidential decree in October 2022 prohibited the sale of foreign owned banks. Based on the current evaluation of the Bank's management, the Ukrainian-Russian conflict does not have a significant negative impact on the OTP Group's business activities, financial situation, effectiveness of its activities, liquidity, and capital situation. Even after the recognition of the potential losses and write-offs outlined above, the Group's capital adequacy remains above the expected regulatory level. There is no sign of significant uncertainties having been arisen regarding carrying out its business as a going concern. Significant estimates affected by the Russian-Ukrainian conflict during the preparation of these Separate Financial Statements During the preparation of these Separate Financial Statements, the Bank identified the following estimates, which were significantly affected by the Russian-Ukrainian conflict: 1) Evaluation of Russian sovereign exposures (government securities) and related reserves for expected credit losses at OTP Bank (as parent company) 2) Evaluation of Ukrainian sovereign exposures (government securities) and related reserves for expected credit losses at OTP Bank (as parent company) 3) Evaluation of derivative transactions denominated in Russian rubles 4) Evaluation of derivative transactions denominated in the Ukrainian hryvnia 5) Provisions for expected credit losses related to Russian and Ukrainian interbank claims and customer loans (following direct exposure to the Russian and Ukrainian markets, non-Russian and Ukrainian bank exposures) 6) Evaluation of investments Securities at amortized cost Securities at fair value through other comprehensive income Investments TOTAL ASSETS Reference 1 1 6 Gross value 37,103 27,415 459,960 524,478 Impairment (12,676) (24,399) (302,502) (339,577) During the evaluation of these assets, the Bank applied the evaluation principles detailed below, which evaluation contains significant estimates on the part of the Management. The results of the estimates may vary significantly depending on the development of the situation in the Russian-Ukrainian conflict. INTEGRATED ANNUAL REPORT 2022 230 OTP BANK IFRS REPORT (SEPARATE) NOTE 4: MACRO-ENVIRONMENT, IMPACT OF ECONOMIC SITUATION ON THE BANK [continued] The principles used in the preparation of the Separate Statement of Financial Position as at 31 December 2022 in connection with the evaluation of Russian and Ukrainian exposures [continued] References 1. Evaluation of Russian sovereign exposures and related reserves for expected credit losses - other exposures of the group Outside of Russia, the marketability of Russian government securities is significantly limited due to sanctions and capital market participants turning away from Russian securities. The credit rating of the Russian state was withdrawn in 2022, the Group classifies the Russian state as non-performing, and in accordance with this, it assigned the affected exposures to the Stage 3 category. The Russian state not only recognizes its obligation and has the necessary financial reserves, but would also be willing to pay, so the increased loss potential is caused by non-traditional credit risks. 2. Valuation of Ukrainian sovereign exposures and related reserves for expected credit losses - other exposures of the group Ukrainian government securities are exclusively in the books of the Ukrainian subsidiary. 3. Valuation of Russian derivative transactions Similar to the bond market, in 2022 the money market inside and outside Russia will also be separated. In the case of futures contracts concluded with local partners on the Russian market, the evaluation is carried out using yield curves available and observable on the local market. In cases where one of the partners is not Russian, the evaluation is done using yield curves available and observable on the international market. In 2022, there was one case of non-performance, the impact of which was HUF 13.8 billion. 4. Valuation of Ukrainian derivatives Similar to the bond market, in 2022 the liquidity and number of transactions in the Ukrainian money market were limited. The Treasury turnover of the Ukrainian bank is low, and a significant part of the derivative transactions are related to the bank's risk management and concluded with the parent company. During the actual evaluation, the expected cash-flow is discounted using yield curves observed based on current market benchmarks (published by the National Bank of Ukraine). 5. Provisions for expected credit losses related to Russian and Ukrainian interbank claims and customer loans (following direct exposure to the Russian and Ukrainian markets, non-Russian and Ukrainian bank exposures) As part of the quarterly monitoring activity, the Bank has identified and analysed the secondary and tertiary negative effects of the war in the corporate segment. Changes related to the meanwhile imposed sanctions – which should have been taken into consideration at analysis - have been followed up. As part of the individual monitoring activity separate monitoring methodology and assessment were prepared for exposures above HUF 250 million as follows: sectors vulnerable to the risk arising from changes of energy / interest / foreign exchange i) ii) customers from sectors with high risks according to the loan policy, especially the hotel industry and real estate utilisation industry iii) municipalities, customers owned by municipalities Customers identified during monitoring activity were classified into Stage 2, expected credit losses were recognised at the corresponding level and amount. As at 31 December 2022 the concerning exposures (HUF 92.7 billion) had HUF 4 billion of expected credit loss, from which impairment loss was recognised in amount of HUF 3 billion. INTEGRATED ANNUAL REPORT 2022 231 OTP BANK IFRS REPORT (SEPARATE) NOTE 4: MACRO-ENVIRONMENT, IMPACT OF ECONOMIC SITUATION ON THE BANK [continued] The principles used in the preparation of the Separate Statement of Financial Position as at 31 December 2022 in connection with the evaluation of Russian and Ukrainian exposures [continued] References [continued] 5. Provisions for expected credit losses related to Russian and Ukrainian interbank claims and customer loans (following direct exposure to the Russian and Ukrainian markets, non-Russian and Ukrainian bank exposures) [continued] When technical or objective default occured due to sanctions the affected exposures were classified into Stage 3. In these cases at least two scenarios were taken into consideration as the estimation of expected cash flows for impairment calculation. At least one scenario represents that case when significant differences occur between the expected and the contractual cash flows. Probabilities shall be allocated to represent the occurence of credit loss, even in that case when most likely there is no need to recognise impairment loss. As at 31 December 2022 gross value of the above mentioned exposures are HUF 11.3 billion and the allocated credit loss is HUF 6.9 billion. 6. Evaluation of investments The Bank has evaluated its investments in 3 countries concerning the Russian-Ukrainian conflict based on discounted cash flows, and as a result impairment loss was recognised for the year ended 31 December 2022 as follows: by Country Impairment loss for the year Ukraine Russia Moldova Total 73,366 18,576 3,163 95,105 INTEGRATED ANNUAL REPORT 2022 232 OTP BANK IFRS REPORT (SEPARATE) NOTE 4: MACRO-ENVIRONMENT, IMPACT OF ECONOMIC SITUATION ON THE BANK [continued] Summary of economic policy measures made and other relevant regulatory changes in the period under review In the section below, the measures and developments which have been made since the beginning of 2022, and – in OTP Bank’s view – are relevant and have materially influenced / can materially influence the operation of the Group members. OTP Bank excludes any liability for the completeness and accuracy of the measures presented herein. Hungary • On 5 April 2022 the National Bank of Hungary raised the available amount under the Green Home Programme by an additional HUF 100 billion, up from the originally announced HUF 200 billion. • Pursuant to Government Decree No. 150/2022 published on 14 April 2022, effective from 29 April the intermediary and other fees paid by the State to commercial banks were amended in the case of the Housing Subsidy for Families (CSOK), the VAT refund subsidy for newly built homes, the repayment by the State of housing loan taken out by families with children, and the baby loans. These fees are now set as absolute amounts, instead of the previous percentage terms. Furthermore, the interest subsidy paid by the state was reduced by one percentage point in the case of baby loans requested after 29 April. • According to the press release made by the National Bank of Hungary on 30 June 2022, the counter-cyclical capital buffer rate will be increased, for the first time since its introduction 6 years ago, to 0.5% effective from 1 July 2023. • The baby loan programme which was originally meant to expire by the end of 2022 was extended by 2 years, till the end of 2024. Interest rate cap For the period between 1 January and 30 June 2022 the Hungarian Government introduced an interest rate cap for variable-rate retail mortgage loans, and with its decision announced on 18 February for housing purposes financial leasing contracts, too. Accordingly, the affected exposures’ reference rate cannot be higher than the relevant contractual reference rate as at 27 October 2021. The modification loss related to the interest rate cap for variable rate mortgage loans announced was recognized in the Bank’s 2021 financial accounts. The extension of the interest rate cap to housing purposes financial leasing contracts did not have a significant negative effect. Pursuant to Government Decree No. 215/2022 (issued on 17 June) the Government extended the interest rate cap for variable-rate retail mortgage loans by an additional 6 months, i.e. until 31 December 2022. The expected one- off effect of the extension of the interest rate cap amounted to -HUF 10.1 billion (after tax) and was booked in the second quarter of 2022. The details of the extension of the interest rate cap scheme were revealed on 14 October 2022. Firstly, the interest rate cap was further extended by 6 months, until the end of June 2023. Secondly, from 1 November 2022 the provisions of the interest rate cap must applied to the market-based mortgages with up to 5 years interest rate repricing period, too. On 22 October 2022 the Government announced that starting from 15 November until 30 June 2023, the reference rate of certain MSE loans will also be capped, as set out by Government Decree 415/2022 (X. 26.) published on 26 October. Accordingly, the provisions shall be applied to HUF denominated, non-subsidized, floating rate loans to micro and small enterprises and financial lease contracts, excluding overdraft loan agreements. In this period, the reference rate of these exposures cannot be higher than the relevant reference rate as specified in the contract as at 28 June 2022 (on that day the 3M BUBOR stood at 7.77%). The financial burden of the MSE rate cap must be shouldered by the banks. The cost of the rate cap scheme is borne by the banks. The expected negative after tax effect of the measures taken in October 2022 amounted to HUF 26.4 billion and was accounted for in the fourth quarter of 2022 in one sum. INTEGRATED ANNUAL REPORT 2022 233 OTP BANK IFRS REPORT (SEPARATE) NOTE 4: MACRO-ENVIRONMENT, IMPACT OF ECONOMIC SITUATION ON THE BANK [continued] Summary of economic policy measures made and other relevant regulatory changes in the period under review [continued] Moratorium, one-off effect In Hungary the first phase of the moratorium on loan payments was effective from 19 March 2020 to 31 December 2020. At the end of 2020 the moratorium was extended in unchanged form for the period between 1 January 2021 and 30 June 2021. Furthermore, according to Government Decree No. 317/2021. (VI. 9.) released on 9 June 2021 the payment moratorium was extended with unchanged conditions until 30 September 2021. Pursuant to Government Decree 536/2021. (IX. 15.) published on 15 September, the Government decided to extend the debt repayment moratorium: the blanket moratorium was extended by an additional month, until the end of October, in an unchanged form. Furthermore, from the beginning of November 2021 until 30 June 2022 only the eligible borrowers can participate in the moratorium provided that they submitted a request to their banks about their intention to stay. Similarly, with its Government Decree No. 216/2022 published on 17 June, the Government further extended the expiry of the moratorium, until the end on 2022. Eligible clients had to notify their bank about their intention to participate in the payment holiday until the end of July 2022. The general payment holiday expired at the end of 2022. Starting from September 2022 to the end of 2023, due to the severe draught, agricultural companies can enjoy a payment moratorium on their working capital and investment loans. Eligible borrowers can decide whether to join the scheme or not. At the end of 2022, HUF 41 billion worth of loans were subject to the moratorium for agricultural companies, making up 0.6% of OTP Core’s total gross loan volume. During the term of the moratorium OTP Bank accrues the unpaid interest in its statement of recognized income, amongst the revenues. At the same time, due to the fact that interest cannot be charged on the unpaid interest, and the unpaid interest will be repaid later, in the course of 2020, 2021 and 2022 altogether HUF 44.1 billion one-off loss emerged in Hungary (after tax). INTEGRATED ANNUAL REPORT 2022 234 OTP BANK IFRS REPORT (SEPARATE) NOTE 4: MACRO-ENVIRONMENT, IMPACT OF ECONOMIC SITUATION ON THE BANK [continued] Financial assets modified during the year ended 31 December 2022 Modification due to prolongation of deadline of covid moratoria till 31 July 2022 (opt in) Gross carrying amount before modification Modification loss Gross carrying amount after modification Loss allowance before modification Net amortised cost after modification Modification due to prolongation of interest rate cap (30 June 2022) Gross carrying amount before modification Modification loss Gross carrying amount after modification Loss allowance before modification Net amortised cost after modification 79,253 (301) 78,952 (23,965) 54,987 66,133 (2,405) 63,728 (1,580) 62,148 Modification due to moratoria related to agriculture and prolongation of the existing moratoria ( 30 September 2022) Gross carrying amount before modification Modification loss Gross carrying amount after modification Loss allowance before modification Net amortised cost after modification 95,560 (1,562) 93,998 (19,404) 74,594 Modification due to prolongation of interest rate cap (30 November 2022) Gross carrying amount before modification Modification loss Gross carrying amount after modification Loss allowance before modification Net amortised cost after modification 151,318 (531) 150,787 (6,094) 144,693 Modification due to scope extension (mortgage loans with 5 year fixing without subsidy) and prolongation of the existing interest rate cap (31 December 2022) Gross carrying amount before modification Modification loss Gross carrying amount after modification Loss allowance before modification Net amortised cost after modification 205,891 (10,058) 195,833 (6,915) 188,918 INTEGRATED ANNUAL REPORT 2022 235 OTP BANK IFRS REPORT (SEPARATE) NOTE 4: MACRO-ENVIRONMENT, IMPACT OF ECONOMIC SITUATION ON THE BANK [continued] Financial assets modified during the year ended 31 December 2021 related to covid moratorium Modification due to prolongation of deadline of covid moratoria till 30 September 2021 Gross carrying amount before modification Modification loss due to covid moratoria Gross carrying amount after modification Loss allowance before modification Net amortised cost after modification Modification due to prolongation of deadline of covid moratoria till 31 October 2021 Gross carrying amount before modification Modification loss due to covid moratoria Gross carrying amount after modification Loss allowance before modification Net amortised cost after modification 668,312 (5,284) 663,028 (55,180) 607,848 665,620 (1,292) 664,328 (58,412) 605,916 In case of credit card and overdraft loans interest charged during the moratoria period should be refunded to the debtors in amount determined as a difference between the charged interest and a premoratoria personal loan interest at 11,99%. The Bank has managed this government measure as loan agreement modification in the financial statements. Gross carrying amount before modification Modification loss due to covid moratoria Gross carrying amount after modification Loss allowance before modification Net amortised cost after modification Modification due to prolongation of deadline of covid moratoria till 30 June 2022 Gross carrying amount before modification Modification loss due to covid moratoria Gross carrying amount after modification Loss allowance before modification Net amortised cost after modification 57,892 (1,983) 55,909 (9,234) 46,675 82,438 (1,614) 80,824 (23,516) 57,308 On 24 December 2021 new regulation was issued on fixing of retail loan product’s interest, under that interest rates of mortgage loans with variable interest shall be fixed at reference rates of 27 October 2021, predictably till 30 June 2022. Gross carrying amount before modification Modification loss due to covid moratoria Gross carrying amount after modification Loss allowance before modification Net amortised cost after modification 67,108 (703) 66,405 (1,625) 64,780 INTEGRATED ANNUAL REPORT 2022 236 OTP BANK IFRS REPORT (SEPARATE) NOTE 5: CASH, AMOUNTS DUE FROM BANKS AND BALANCES WITH THE NATIONAL BANK OF HUNGARY (in HUF mn) Cash on hand: In HUF In foreign currency Amounts due from banks and balances with National Bank of Hungary: Within one year: In HUF In foreign currency Subtotal Loss allowance Subtotal Average amount of compulsory reserve Total Rate of the compulsory reserve 2022 80,809 20,506 101,315 739,382 252,854 992,236 1,093,551 2021 82,839 21,182 104,021 81,513 289,596 371,109 475,130 (1,353) (185) 1,092,198 474,945 740,428 351,770 6% 99,303 375,642 1% The Bank shall deposit compulsory reserve in a determined percent of its liabilities at NBH. Liabilities considered in compulsory reserve calculation are as follows: a) deposits and loans, b) debt instruments, c) repo transactions. The amount of the compulsory reserve is the multiplication of the daily average of the liabilities considered in the compulsory reserve calculation and compulsory reserve rate, which are determined by the NBH in a specific decree. The Bank is required to complete compulsory reserve requirements in average in the second month after the reserve calculation period, requirements shall be completed once a month on the last calendar day. The Bank complies with the compulsory reserve requirements by the deposit of the adequate amount of cash as the calculated compulsory reserve on the bank account at NBH in monthly average. Based on NBH decision compulsory reserve shall be 5%, which is effective from 1 October 2022. An analysis of the change in the loss allowance on placement losses is as follows: Balance as at 1 January Loss allowance Release of loss allowance FX movement Closing balance 2022 185 5,023 (3,813) (42) 1,353 2021 - 185 - - 185 INTEGRATED ANNUAL REPORT 2022 237 OTP BANK IFRS REPORT (SEPARATE) NOTE 6: PLACEMENTS WITH OTHER BANKS (in HUF mn) Within one year: In HUF In foreign currency Over one year In HUF In foreign currency 2022 2021 825,820 366,574 1,192,394 1,215,114 511,103 1,726,217 1,388,709 372,361 1,761,070 747,871 65,761 813,632 Total placements 2,918,611 2,574,702 Loss allowance on placement losses (18,782) (7,490) Total 2,899,829 2,567,212 An analysis of the change in the loss allowance on placement losses is as follows: Balance as at 1 January Loss allowance Release of loss allowance Use of loss allowance FX movement Closing balance Interest conditions of placements with other banks (%): Placements with other banks in HUF Placements with other banks in foreign currency Average interest of placements with other banks 2022 2021 7,490 27,571 (17,026) - 747 18,782 5,819 20,524 (18,911) (2) 60 7,490 2022 2021 0%-25.7% 0%-13.29% 7.51% 0% - 5.9% (0.59%) - 29% 1.63% INTEGRATED ANNUAL REPORT 2022 238 OTP BANK IFRS REPORT (SEPARATE) NOTE 7: REPO RECEIVABLES (in HUF mn) Within one year: In HUF Total gross amount Loss allowance on repo receivables Total repo receivables 2022 248,696 248,696 248,696 (2,167) 246,529 An analysis of the change in the loss allowance on repo receivables is as follows: 2021 33,710 33,710 33,710 (72) 33,638 2021 292 449 (669) 72 2022 72 4,480 (2,385) 2,167 2022 2021 10.7%-18% 7.31% 2%-3.2% 0.29% Balance as at 1 January Loss allowance Release of loss allowance Closing balance Interest conditions of repo receivables (%): Repo receivables in HUF Average interest of repo receivables INTEGRATED ANNUAL REPORT 2022 239 OTP BANK IFRS REPORT (SEPARATE) NOTE 8: FINANCIAL ASSETS AT FAIR VALUE THROUGH PROFIT OR LOSS (in HUF mn) Held for trading securities: Government bonds Other non-interest bearing securities Hungarian government discounted Treasury Bills Corporate shares and investments Mortgage bonds Other securities Subtotal Securities mandatorily measured at fair value through profit or loss Shares in investment funds Shares Subtotal Held for trading derivative financial instruments: Foreign currency swaps Interest rate swaps CCIRS and mark-to-market CCIRS swaps Other derivative transactions Subtotal Total 2022 67,521 274 4,785 385 82 1,748 74,795 29,029 1,469 30,498 121,854 121,506 14,847 46,512 304,719 410,012 Interest conditions and the remaining maturities of securities held for trading are as follows: Within one year: variable interest fixed interest Over one year: variable interest fixed interest Non-interest bearing securities Total Securities held for trading denominated in HUF Securities held for trading denominated in foreign currency Securities held for trading total Government bonds denominated in HUF Government bonds denominated in foreign currency Government securities total 2022 3,041 10,467 13,508 9,535 51,093 60,628 659 74,795 89% 11% 100% 90% 10% 100% 2021 30,827 1,134 869 599 116 2,088 35,633 25,126 2,935 28,061 38,811 59,097 11,649 73,211 182,768 246,462 2021 111 4,163 4,274 1,544 28,083 29,627 1,732 35,633 81% 19% 100% 83% 17% 100% Interest rates on securities held for trading in HUF Interest rates on securities held for trading in foreign currency Average interest on securities held for trading 0%-16.69% 0%-6.75% 0%-7.63% 6.44% 0%-5.75% 1.17% INTEGRATED ANNUAL REPORT 2022 240 OTP BANK IFRS REPORT (SEPARATE) NOTE 8: FINANCIAL ASSETS AT FAIR VALUE THROUGH PROFIT OR LOSS (in HUF mn) [continued] Interest conditions and the remaining maturities of securities mandatorily measured at fair value through profit or loss are as follows: Non-interest bearing securities Total Securities mandatorily measured at fair value through profit or loss denominated in HUF Securities mandatorily measured at fair value through profit or loss denominated in foreign currency Securities mandatorily measured at fair value through profit or loss total 2022 30,498 30,498 69% 31% 2021 28,061 28,061 67% 33% 100% 100% NOTE 9: SECURITIES AT FAIR VALUE THROUGH OTHER COMPREHENSIVE INCOME (in HUF mn) Securities at fair value through other comprehensive income Government bonds Mortgage bonds Interest bearing treasury bills Other securities Listed securities in HUF in foreign currency Non-listed securities in HUF in foreign currency Subtotal Non-trading equity instruments -non-listed securities in HUF in foreign currency 2022 2021 177,393 356,540 182,726 62,594 7,290 - 7,290 55,304 14,304 41,000 779,253 17,922 528 17,394 17,922 278,875 217,941 63,115 64,870 43,759 2,896 40,863 21,111 15,487 5,624 624,801 17,138 529 16,609 17,138 Securities at fair value through other comprehensive income total 797,175 641,939 INTEGRATED ANNUAL REPORT 2022 241 2021 392 136 13,222 3,388 17,138 2021 1,089 66,970 68,059 71,344 485,398 556,742 17,138 2022 - 261,529 261,529 235,661 282,063 517,724 17,922 797,175 641,939 83% 17% 100% 73% 27% 100% OTP BANK IFRS REPORT (SEPARATE) NOTE 9: SECURITIES AT FAIR VALUE THROUGH OTHER COMPREHENSIVE INCOME (in HUF mn) [continued] Detailed information of the non-trading equity instruments to be measured at fair value through other comprehensive income: Name Garantiqa Hage / Közvil / Pénzügykut OBS VISA A Preferred Currency HUF HUF EUR USD 2022 392 136 11,915 5,479 17,922 Interest conditions and the remaining maturities of FVOCI securities can be analysed as follows: Within one year: variable interest fixed interest Over one year: variable interest fixed interest Non-interest bearing securities Total FVOCI securities denominated in HUF FVOCI securities denominated in foreign currency FVOCI securities total Interest rates on FVOCI securities denominated in HUF Interest rates on FVOCI securities denominated in foreign currency 1.25%-17.36% 1.25%-11% 0.74%-16% 0%-16% Average interest on FVOCI securities 5.27% 2.85% Certain fixed-rate mortgage bonds and other securities are hedged against interest rate risk. (See Note 45.4.) Net gain / (loss) reclassified from other comprehensive income to statement of profit or loss Fair value of the hedged securities: Government bonds Other bonds 2022 2021 (22,816) (26,440) 118,979 43,870 162,849 143,184 42,326 185,510 During the year ended 31 December 2022 and the year ended 31 December 2021 the Bank didn’t sell any of equity instruments designated to measure at fair value through other comprehensive income. INTEGRATED ANNUAL REPORT 2022 242 OTP BANK IFRS REPORT (SEPARATE) NOTE 10: SECURITIES AT AMORTISED COST (in HUF mn) Government bonds Other bonds Mortgage bonds Subtotal Loss allowance Total 2022 2021 2,979,400 314,237 24,586 3,318,223 (35,850) 2,863,259 190,155 24,309 3,077,723 (6,685) 3,282,373 3,071,038 Interest conditions and the remaining maturities of securities at amortised cost can be analysed as follows: Within one year: variable interest fixed interest Over one year: variable interest fixed interest Total 2022 - 321,879 321,879 24,601 2,971,743 2,996,344 3,318,223 2021 8,101 305,694 313,795 5,122 2,758,806 2,763,928 3,077,723 The distribution of the securities at amortised cost by currency (%): Securities at amortised cost denominated in HUF Securities at amortised cost denominated in foreign currency Securities at amortised cost total Interest rates on securities at amortised cost Average interest on securities at amortised cost denominated in HUF 2022 72% 28% 100% 0.1%-17.74% 2021 83% 17% 100% 0.1%-12.75% 2.93% 2.84% An analysis of change in the loss allowance on securities at amortised cost: Balance as at 1 January Reclassification Balance as at 1 January Loss allowance Release of loss allowance FX movement Closing balance 2022 6,685 - 6,685 31,696 (4,073) 1,542 35,850 2021 3,288 1,281 4,569 4,404 (2,370) 82 6,685 INTEGRATED ANNUAL REPORT 2022 243 OTP BANK IFRS REPORT (SEPARATE) NOTE 11: LOANS (in HUF mn) Loans measured at fair value through profit or loss Within one year Over one year 2022 2021 39,694 753,548 32,091 629,921 Loans measured at fair value through profit or loss total 793,242 662,012 Loans measured at fair value through profit or loss are mandatorily measured at fair value through profit or loss. Loans measured at amortised cost, net of allowance for loan losses Within one year Over one year Loans at amortised cost gross total Loss allowance on loan losses Loans at amortised cost total An analysis of the loan portfolio by currency (%): In HUF In foreign currency Total 2022 2021 2,481,249 2,518,671 4,999,920 2,125,908 2,062,114 4,188,022 (174,880) (155,557) 4,825,040 4,032,465 2022 58% 42% 100% 2021 62% 38% 100% Interest rates of the loan portfolio mandatorily measured at fair value through profit or loss are as follows (%): 2022 2021 Loans denominated in HUF 2,89%-18,26% 1.5% - 9.85% Average interest on loans denominated in HUF 4.94% 4.56% Interest rates of the loan portfolio measured at amortised cost are as follows (%): Loans denominated in HUF Loans denominated in foreign currency 2022 2021 0%-43.7% (0.1%)-20.1% 0%-37.5% (0.59%)-13% Average interest on loans denominated in HUF Average interest on loans denominated in foreign currency 9.77% 2.74% 6.64% 1.48% INTEGRATED ANNUAL REPORT 2022 244 OTP BANK IFRS REPORT (SEPARATE) NOTE 11: LOANS (in HUF mn) [continued] For an analysis of the loan portfolio by stages, countries and rating categories please see Note 36.1. An analysis of the change in the loss allowance on loans at amortised cost is as follows: Balance as at 1 January Reclassification Balance as at 1 January Loss allowance Release of loss allowance Use of loss allowance Partial write-off FX movement Closing balance 2022 155,557 - 155,557 252,002 (210,342) (21,274) (7,348) 6,285 174,880 2021 123,670 (1,281) 122,389 221,084 (180,291) (6,951) (1,733) 1,059 155,557 The Bank sells non-performing loans without recourse at estimated fair value to a wholly owned subsidiary, OTP Factoring Ltd. INTEGRATED ANNUAL REPORT 2022 245 OTP BANK IFRS REPORT (SEPARATE) NOTE 12: INVESTMENTS IN SUBSIDIARIES, ASSOCIATES, JOINT VENTURES AND OTHER INVESTMENTS (in HUF mn) Investments in subsidiaries: Controlling interest Other Subtotal Impairment loss Total 2022 2,116,059 23,427 2,139,486 (542,769) 1,596,717 2021 2,006,178 16,086 2,022,264 (449,256) 1,573,008 Other investments contain certain securities accounted at cost. Significant subsidiaries Investments in companies in which the Bank has a controlling interest (direct) are detailed below. All companies are incorporated in Hungary unless indicated otherwise: OTP Bank JSC (Ukraine) DSK Bank EAD (Bulgaria) OTP banka Srbija akcionarsko drustvo Novi Sad (Serbia) OTP banka Hrvatska d.d. (Croatia) OTP Bank Romania S.A. (Romania) OTP Mortgage Bank Ltd. SKB Banka d.d. Ljubljana (Slovenia) JSC "OTP Bank" (Russia) Crnogorska komercijalna banka a.d. (Montenegro) OOO AlyansReserv (Russia) Air-Invest Llc. OTP Holding Malta Ltd. Balansz Private Open-end Investment Fund Bank Center No. 1. Ltd. OTP Factoring Ltd. Other Total 2022 2021 % Held (direct/indirect) 100% 100% Gross book value 311,390 280,722 % Held (direct/indirect) 100% 100% Gross book value 311,390 280,692 100% 100% 100% 100% 100% 98% 100% 100% 100% 100% 100% 100% 100% 262,759 205,349 167,764 199,294 107,689 74,337 72,784 50,074 39,248 32,359 60,630 26,063 25,411 200,186 2,116,059 100% 100% 100% 100% 100% 98% 100% 100% 100% 100% 100% 100% 100% 262,759 205,349 167,764 154,294 107,689 74,337 72,784 50,074 39,248 32,359 29,150 26,063 25,411 166,815 2,006,178 An analysis of the change in the impairment loss is as follows: Balance as at 1 January Impairment loss for the period Reversal of impairment loss Use of impairment loss Closing balance 2022 449,256 147,712 (54,199) - 542,769 2021 425,163 59,132 (31,712) (3,327) 449,256 INTEGRATED ANNUAL REPORT 2022 246 OTP BANK IFRS REPORT (SEPARATE) NOTE 12: INVESTMENTS IN SUBSIDIARIES, ASSOCIATES, JOINT VENTURES AND OTHER INVESTMENTS (in HUF mn) [continued] The Bank decided that the recoverable amount is determined based on fair value less cost of disposal. The Bank prepared impairment tests of the subsidiaries based on two different net present value calculation methods that show the same result; however they represent different economical logics. On one hand is the discount cash flow method (“DCF”) that calculates the value of the subsidiaries by discounting their expected cash flow; on the other hand the economic value added (“EVA”) method estimates the value of the subsidiaries from the initial invested capital and the present value of the economic profit that the companies are expected to generate in the future. Applying the EVA method was more practically than DCF method because it gives a more realistic picture about how the explicit period and the residual value can contribute to the value of the company. The Bank, in its strategic plan, has taken into consideration the effects of the present global economic situation, the cautious recovery of economic situation and outlook, the associated risks and their possible effect on the financial sector as well as the current and expected availability of wholesale funding. An analysis of the impairment loss by significant subsidiaries is as follows: OTP Bank JSC (Ukraine) OTP Bank Romania S.A. (Romania) OTP Mortgage Bank Ltd. OTP banka Srbija akcionarsko drustvo Novi Sad (Serbia) JSC "OTP Bank" (Russia) LLC Alliance Reserve (Russia) OTP Life Annuity Ltd. Air-Invest Ltd. Monicomp Ltd. Crnogorska komercijalna banka a.d. (Montenegro) Balansz Private Open-end Investment Fund OTP Real Estate Ltd. R.E. Four d.o.o. (Serbia) Total 2022 280,763 77,962 84,707 23,452 2,775 15,801 10,969 10,965 8,632 4,495 5,110 5,557 3,763 534,951 2021 207,397 77,962 65,096 43,477 - - 10,969 10,491 8,632 6,697 5,566 5,557 3,763 445,607 Dividend income from significant subsidiaries and shares held-for-trading and shares measured at fair value through other comprehensive income is as follows: DSK Bank EAD (Bulgaria) OTP Factoring Ltd. OTP Mortgage Bank Ltd. OTP banka dioničko društvo (Croatia) Merkantil Bank Ltd. OTP Holding Ltd. (Cyprus) OTP Holding Malta Ltd. (Malta) OTP Real Estate Investment Fund Management Ltd. OTP Bank JSC (Ukraine) Inga Kettő Llc. Monicomp Ltd. Other Subtotal Dividend from shares held-for-trading Dividend comprehensive income Total fair value shares from through other 2022 74,314 45,000 18,000 14,637 8,000 7,800 4,803 3,500 - - - 6,099 182,153 12,166 207 194,526 2021 - 44,000 - 12,244 - - 5,531 3,500 12,853 11,000 1,173 4,741 95,042 3,844 151 99,037 INTEGRATED ANNUAL REPORT 2022 247 OTP BANK IFRS REPORT (SEPARATE) NOTE 12: INVESTMENTS IN SUBSIDIARIES, ASSOCIATES, JOINT VENTURES AND OTHER INVESTMENTS (in HUF mn) [continued] Significant associates and joint ventures The main figures of the Bank’s indirectly owned associates and joint ventures at cost1: As at 31 December 2022 List of associated entities OTP Risk Fund I. OTP-DayOne Magvető Fund Company for Cash Services AD Edrone spółka z ograniczoną odpowiedzialnością NovaKid Inc. Banzai Cloud Closed Co. Plc. ClodeCool Ltd. Pepita.hu Closed Co. Plc. Seon Holdings Ltd. VCC Live Group Closed Co. Plc. Cursor Insight Ltd. Fabetker Ltd. OneSoil Ag. Packhelp Spółka Akcyjna Phoenix Play Invest closed Co. Plc. Algorithmiq Invest Closed Co. Plc. NGY Propertiers Investment SRL Deligo Vision Technologies Ltd. GRADUW Invest Closed Co. Plc. SEH-Partner Ltd. Simonyi út 20. Ingatlanhasznosító Ltd. Fintech CEE Software Invest Ltd. New Frontier Technology Invest SARL Mindgram sp. z.o.o 1 Based on unaudited financial statements. Carrying amount Ownership of OTP Bank Profit after tax Country / Headquarter Activity 520 683 392 822 1,723 216 1,323 1,323 8,689 1,308 75 1 362 1,168 2,350 8,195 11,735 205 4,803 6,403 90 127 3,393 200 44.12% 22.00% 25.00% 23.54% 4.07% 17.42% 20.15% 40.00% 19.26% 24.75% 6.75% 20.48% 3.72% 3.15% 21.69% 21.69% 14.54% 2.50% 3.81% 30.56% 47.62% 20.04% 14.01% 2.38% (52) Hungary /Budapest 13 Hungary /Budapest 183 Bulgaria / Sofia (516) Poland / Krakow (5,409) USA / San Francisco 267 Hungary /Budapest 1 Hungary /Budapest (157) Hungary / Szeghalom (3) UK / London (226) Hungary /Budapest n.a. UK / London 135 Hungary / Nádudvar (514) Switzerland / Zurich (3,385) Poland / Warsaw (1) Hungary /Budapest 792 Hungary /Budapest (22,567) Romania / Bucharest (15) Hungary /Budapest 131 Hungary /Budapest n.a. Hungary /Budapest - Hungary /Debrecen n.a. Hungary /Budapest n.a. Luxemburg / Luxembourg (328) Poland / Warsaw Trusts, funds and similar financial entities Trusts, funds and similar financial entities Other financial service activities, except insurance and pension funding Computer programming activities Online kids English learning platform operator Computer programming activities Other education Retail sale via mail order houses or via Internet Computer programming activities Computer programming activities Computer programming activities Manufacture of concrete products for construction purposes Computer programming activities Manufacture of corrugated paper and paperboard and of containers of paper and paperboard Activities of holding companies Activities of holding companies Renting and operating of own or leased real estate Other information service activities Sale and purchase of own real estate Activities of holding companies Renting and operating of own or leased real estate Activities of holding companies Activities of holding companies Other human health activities INTEGRATED ANNUAL REPORT 2022 248 OTP BANK IFRS REPORT (SEPARATE) NOTE 12: INVESTMENTS IN SUBSIDIARIES, ASSOCIATES, JOINT VENTURES AND OTHER INVESTMENTS (in HUF mn) [continued] Significant associates and joint ventures [continued] As at 31 December 2021 List of associated entities OTP Kockázati Fund I. OTP-DayOne Magvető Fund Company for Cash Services AD Edrone spółka z ograniczoną odpowiedzialnością Graboplast Closed Co. Plc. NovaKid Inc. Banzai Cloud Closed Co. Plc. ClodeCool Ltd. Pepita.hu Closed Co. Plc. Seon Holdings Ltd. Starschema Ltd. VCC Live Group Closed Co. Plc. Virtual Solutaion Ltd. Yieldigo s.r.o. Szallas.hu Closed Co. Plc. Cursor Insight LTD Fabetker Ltd. OneSoil Ag. Packhelp Spółka Akcyjna PHOENIX PLAY Invest closed Co. Plc. ALGORITHMIQ Invest Closed Co. Plc. NGY Propertiers Investment SRL Carrying amount Ownership of OTP Bank Profit after tax Country / Headquarter Activity 526 288 392 779 700 2,006 374 1,770 516 4,756 3,944 1,672 - 76 8,809 146 1 318 2,160 3,081 8,996 12,331 44.12% 22.00% 25.00% 17.34% 7.00% 4.17% 17.42% 20.15% 34.00% 23.86% 36.19% 49.56% 8.33% 1.97% 51.19% 6.75% 20.48% 3.72% 1.00% 21.69% 21.69% 14.54% (52) Hungary /Budapest 13 Hungary /Budapest (183) Bulgaria / Sofia Trusts, funds and similar financial entities Trusts, funds and similar financial entities Other financial service activities, exc. insurance and pension (293) Poland / Krakow n.a. Hungary / Győr (4,621) USA / San Francisco n.a. Hungary /Budapest 1 Hungary /Budapest (132) Hungary / Szeghalom (4) UK / London n.a. Hungary /Budapest (203) Hungary /Budapest n.a. Hungary /Budapest (168) Czech Republic/Prague 1,278 Hungary / Miskolc (247) UK / London 132 Hungary / Nádudvar (1,058) Switzerland / Zurich (3,038) Poland / Warsaw (1) Hungary /Budapest 792 Hungary /Budapest (22,567) Romania / Bucharest funding Computer programming activities Manufacture of builders’ ware of plastic Online kids English learning platform operator Computer programming activities Other education n.e.c. Retail sale via mail order houses or via Internet Computer programming activities Computer consultancy activities Computer programming activities Computer programming activities Computer programming activities Web portals Computer programming activities Manufacture of concrete products for construction purposes Computer programming activities Manufacture of corrugated paper and paperboard and of containers of paper and paperboard Activities of holding companies Activities of holding companies Renting and operating of own or leased real estate INTEGRATED ANNUAL REPORT 2022 249 OTP BANK IFRS REPORT (SEPARATE) NOTE 12: INVESTMENTS IN SUBSIDIARIES, ASSOCIATES, JOINT VENTURES AND OTHER INVESTMENTS (in HUF mn) [continued] Significant events related to investments The registered capital of the Romanian subsidiary of OTP Bank was increased to RON 2.279.253.360 from RON 2.079.253.200 The financial closure of the transaction to purchase 100% shareholding of Alpha Bank Albania SH.A., the Albanian subsidiary of the Alpha Bank Group has been completed on 18 July 2022, based on the share sale and purchase agreement concluded between OTP Bank and Alpha Bank Group’s member, Alpha International Holdings Single Member S.A., on 6 December 2021. The integration of OTP Bank Albania and Alpha Bank Albania is expected to be completed in 2023. 25 October 2022 the Metropolitan Court of Registration has registered a capital increase at OTP Mortgage Bank Ltd. The registered capital of OTP Mortgage Bank Ltd. was increased to HUF 57,000,000,000 from HUF 37,000,000,000. 12 December 2022 OTP Bank signed a purchase and sale contract for the purchase of the majority stake of Ipoteka Bank and its subsidiaries with the Ministry of Finance of the Republic of Uzbekistan. OTP Bank will purchase 100% of the shares held by the Ministry of Finance of the Republic of Uzbekistan (nearly 97% total shareholding) in two steps: 75% of the shares now and the remaining 25% three years after the financial closing of the first transaction. Ipoteka Bank is the fifth largest bank in Uzbekistan, with a market share of 8.5% based on total assets on 1 October 2022, with more than 1.6 million retail customers and a significant corporate clientele. 31 December 2022 the registered capital of OTP Mortgage Bank Ltd. was increased to HUF 82,000,000,000 from HUF 57,000,000,000. The financial completion of the transaction to purchase 100% shareholding of Nova KBM d.d. and its subsidiary – after obtaining all necessary regulatory approvals – has been completed on 6 February 2023, based on the share sale and purchase agreement concluded between OTP Bank, funds managed by affiliates of Apollo Global Management, Inc. and EBRD, on 31 May 2021. The acquisition of the bank is the most significant acquisition in the history of OTP Group. With a market share of 20.7% in terms of total assets as of September 2022 and more than 1,500 employees as of the end of 2022, Nova KBM d.d. is the 2nd largest bank in the Slovenian banking market. As a universal bank, it has been active in the retail and corporate segments as well. With the transaction closing of Nova KBM, OTP Group has around 30% share in the Slovenian banking market on a pro-forma basis. The integration process of the two Slovenian subsidiaries, SKB banka purchased in 2019 and Nova KBM is expected to be completed in 2024. The new bank will be the largest foreign subsidiary of OTP Group. INTEGRATED ANNUAL REPORT 2022 250 OTP BANK IFRS REPORT (SEPARATE) NOTE 13: PROPERTY, EQUIPMENT AND INTANGIBLE ASSETS (in HUF mn) For the year ended 31 December 2022 Intangible assets Property Office equipment and vehicles Vehicles Construction in progress Right of use assets Total Cost Balance as at 1 January Additions Disposals Balance as at 31 Decembere 188,853 59,839 (35,607) 74,506 5,979 (1,890) 103,469 15,804 (6,349) 213,085 78,595 112,924 Depreciation and Amortization Balance as at 1 January Charge for the year Disposals Balance as at 31 Decembere Net book value Balance as at 1 January Balance as at 31 December 126,692 24,768 (7,855) 28,316 4,347 (2,515) 77,404 10,211 (5,038) 143,605 30,148 82,577 62,161 46,190 26,065 69,480 48,447 30,347 199 12 (14) 197 62 29 (14) 77 137 120 9,425 28,117 (21,892) 31,118 29,156 (925) 407,570 138,907 (66,677) 15,650 59,349 479,800 - - - - 13,887 7,383 (1,803) 246,361 46,738 (17,225) 19,467 275,874 9,425 17,231 161,209 15,650 39,882 203,926 For the year ended 31 December 2021 Intangible assets Property Office equipment and vehicles Vehicles Construction in progress Right of use assets Total Cost Balance as at 1 January Additions Disposals Balance as at 31 December 164,875 52,130 (28,152) 72,277 4,074 (1,845) 93,878 13,434 (3,843) 188,853 74,506 103,469 Depreciation and Amortization Balance as at 1 January Charge for the year Disposals Balance as at 31 December Net book value Balance as at 1 January Balance as at 31 December 107,236 23,032 (3,576) 25,789 3,284 (757) 71,899 9,190 (3,685) 126,692 28,316 77,404 57,639 46,488 21,979 62,161 46,190 26,065 The Bank has no intangible assets with indefinite useful life. 160 87 (48) 199 74 25 (37) 62 86 137 9,421 20,394 (20,390) 22,443 8,675 - 363,054 98,794 (54,278) 9,425 31,118 407,570 - - - - 8,964 5,161 (238) 213,962 40,692 (8,293) 13,887 246,361 9,421 13,479 149,092 9,425 17,231 161,209 INTEGRATED ANNUAL REPORT 2022 251 OTP BANK IFRS REPORT (SEPARATE) NOTE 14: INVESTMENT PROPERTIES (in HUF mn) For the year ended 31 December 2022 and 2021, respectively Property Cost Balance as at 1 January Additions result from subsequent expenditure Disposals Closing balance Depreciation and Amortization Balance as at 1 January Charge for the period Disposals Closing balance Net book value Balance as at 1 January Closing balance 2022 2021 5,013 14 - 5,027 685 135 - 820 2,577 2,640 (204) 5,013 641 92 (48) 685 4,328 4,207 1,936 4,328 According to the opinion of the Management there is no significant difference between the fair value and the carrying value of these properties. Income and Expenses Rental income Depreciation 2022 8 135 2021 6 92 NOTE 15: FAIR VALUE OF DERIVATIVE FINANCIAL ASSETS DESIGNATED AS HEDGE ACCOUNTING (in HUF mn) Positive fair value of derivative financial assets designated as hedge accounting: Interest rate swaps designated as fair value hedge CCIRS designated as fair value hedge Interest rate swaps designated as cash flow hedge Total 2022 2021 29,139 20,732 (2,651) 47,220 13,276 5,471 (1,020) 17,727 INTEGRATED ANNUAL REPORT 2022 252 OTP BANK IFRS REPORT (SEPARATE) NOTE 16: OTHER ASSETS1 (in HUF mn) 2022 2021 Other financial assets Receivables from OTP Employee Stock Ownership Program (OTP ESOP) Prepayments and accrued income Receivables from investment services Stock exchange deposit Trade receivables Receivables from card operations Receivables from suppliers Other Loss allowance Other financial assets total Other non-financial assets Prepayments and accrued income Receivable related to Hungarian Government subsidies Other Provision for impairment on other assets Other non-financial assets total 119,123 15,674 34,828 30,939 11,053 34,783 6,621 9,130 262,151 (7,026) 255,125 44,106 19,076 12,144 75,326 (699) 74,627 84,304 16,391 16,074 11,643 10,519 10,423 5,812 3,729 158,895 (5,148) 153,747 44,411 14,281 12,563 71,255 (514) 70,741 Total 329,752 224,488 An analysis of the movement in the loss allowance on other financial assets is as follows: Balance as at 1 January Charge for the period Release of loss allowance Use of loss allowance FX movement Balance as at 31 December 2022 2021 5,148 10,572 (7,715) (982) 3 7,026 7,928 3,888 (5,972) (707) 11 5,148 An analysis of the movement in the loss allowance on other non-financial assets is as follows: Balance as at 1 January Charge for the period Release of provision FX movement Balance as at 31 December 2022 514 255 (106) 36 699 2021 482 86 (74) 20 514 1 Other assets are expected to be recovered or settled no more than twelve months after the reporting period. INTEGRATED ANNUAL REPORT 2022 253 OTP BANK IFRS REPORT (SEPARATE) NOTE 17: AMOUNTS DUE TO BANKS AND DEPOSITS FROM THE NATIONAL BANK OF HUNGARY AND OTHER BANKS (in HUF mn) Within one year: In HUF In foreign currency Over one year: In HUF In foreign currency Subtotal Total 2022 554,794 448,935 1,003,729 392,947 339,452 732,399 1,736,128 1,736,128 2021 354,647 81,550 436,197 588,161 26,845 615,006 1,051,203 1,051,203 Interest rates on amounts due to banks and deposits from the NBH and other banks are as follows (%): Within one year: In HUF In foreign currency Over one year: In HUF In foreign currency 2022 2021 (2.4%) - 18% (2.31%) - 5.9% (2.4%) - 9.23% (2.4%) - 6.84% (2.4%)-4.5% (2.4%)-8.5% (2.4%)-1.3% (2.4%)-1.5% Average interest on amounts due to banks in HUF Average interest on amounts due to banks in foreign currency 3.24% 1.50% NOTE 18: REPO LIABILITIES (in HUF mn) Within one year: In HUF In foreign currency Over one year: In HUF In foreign currency Subtotal Total 2022 122,676 15,561 138,237 82,200 187,929 270,129 408,366 408,366 1.26% 1.14% 2021 49,726 - 49,726 - 36,854 36,854 86,580 86,580 Interest rates on repo liabilities are as follows (%): Within one year: In HUF In foreign currency Over one year: In HUF In foreign currency Average interest on repo liabilities in HUF Average interest on repo liabilities in foreign currency 2022 2021 11.5% - 15.47% 2.47%-5.2% 15% 3.58%-3.69% 9.31% 0.30% 1.5%-2.8% - - (0.35)% 11.67% 0.67% INTEGRATED ANNUAL REPORT 2022 254 OTP BANK IFRS REPORT (SEPARATE) NOTE 19: DEPOSITS FROM CUSTOMERS (in HUF mn) Within one year: In HUF In foreign currency Over one year: In HUF Total Interest rates on deposits from customers are as follows (%): Within one year in HUF Over one year in HUF In foreign currency 2022 2021 7,982,882 3,112,937 11,095,819 23,339 23,339 7,823,118 2,079,643 9,902,761 45,771 45,771 11,119,158 9,948,532 2022 0%-17.95% 0%-13% (0.4%)-45.1% 2021 (2.48%)-7.96% 0.01%-2.4% (0.6%)-17.2% Average interest on deposits from customers in HUF Average interest on deposits from customers in foreign currency 2.32% 0.12% 0.16% 0.01% An analysis of deposits from customers by type, not including accrued interest, is as follows: Retail deposits Household deposits Corporate deposits Deposits to medium and large corporates Municipality deposits Total 2022 2021 4,756,881 4,756,881 6,362,277 5,570,866 791,411 43% 43% 57% 50% 7% 11,119,158 100% 4,475,933 4,475,933 5,472,599 4,639,198 833,401 45% 45% 55% 47% 8% 9,948,532 100% INTEGRATED ANNUAL REPORT 2022 255 OTP BANK IFRS REPORT (SEPARATE) NOTE 20: LIABILITIES FROM ISSUED SECURITIES (in HUF mn) Within one year: In HUF In foreign currency Over one year: In HUF In foreign currency Total Interest rates on liabilities from issued securities are as follows (%): Issued securities denominated in HUF Issued securities denominated in foreign currency Average interest on issued securities denominated in HUF Average interest on issued securities denominated in foreign currency 2022 4,311 6,351 10,662 46,192 441,855 488,047 498,709 2022 0,6%-15% 5,5%-7,35% 2.63% 2.95% 2021 12,048 - 12,048 10,105 - 10,105 22,153 2021 0%-1.7% - 4.9% - Term Note Program in the value of HUF 200 billion for the year of 2022/2023 On 10 May 2022 the Bank initiated term note program in the value of HUF 200 billion with the intention of issuing registered dematerialized bonds in public. The NBH approved on 10 August 2022 the prospectus of Term Note Program. The prospectus is valid for 12 months following the disclosure. The Issuer can initiate to introduce the bonds issued under the program to the Hungarian and to other stock exchanges without any obligations. Term Note Program in the value of HUF 200 billion for the year of 2021/2022 On 28 May 2021 the Bank initiated term note program in the value of HUF 200 billion with the intention of issuing registered dematerialized bonds in public. The NBH approved on 8 July 2021 the prospectus of Term Note Program. The prospectus is valid for 12 months following the disclosure. The Issuer can initiate to introduce the bonds issued under the program to the Hungarian and to other stock exchanges without any obligations. Green Senior Preferred Notes issued in amount of EUR 400 million „Green” notes have been issued by the Bank on 13 July 2022 as value date in the aggregate nominal amount of EUR 400 million. The non-call 2 years senior preferred notes have a three years term and carry an annually paid fixed coupon of 5.500% in the first two years. With respect to the third year, the quarterly coupon is calculated as the sum of the initial margin (of 426.5 basis points) and the 3 month EURIBOR rate. The notes are rated ’BBB’ by S&P Ratings Europe Limited and ’BBB+’ by Scope Ratings GmbH. The notes are listed on the Luxembourg Stock Exchange. Green Senior Preferred Notes issued in amount of USD 60 million The Bank has issued “green” notes on 29 September 2022 in the aggregate nominal amount of USD 60 million. The notes are rated ’BBB’ by S&P Ratings Europe Limited and ’BBB+’ by Scope Ratings GmbH. The notes are listed on the Luxembourg Stock Exchange. Green Senior Preferred Notes issued in amount of EUR 650 million Notes were issued on 1 December 2022 as value date, in the aggregate nominal amount of EUR 650 million. The 3.25 Non-Call 2.25 years Senior Preferred Notes were priced on 23 November 2022. Notes are rated ’BBB’ by S&P Ratings Europe Limited and ’BBB+’ by Scope Ratings GmbH.The notes are listed on the Luxembourg Stock Exchange. INTEGRATED ANNUAL REPORT 2022 256 OTP BANK IFRS REPORT (SEPARATE) NOTE 20: LIABILITIES FROM ISSUED SECURITIES (in HUF mn) [continued] Notes issued in amount of USD 650 million See details about the event in Note 47. Hedge accounting Certain issued structured securities are hedged by the Bank with interest rate swaps (“IRS”) which exchange the fixed and floating interest rate with the interest rate of the securities between the parties at a notional amount that equals the nominal amount of the hedged securities. These are considered as fair value hedge relationships as they cover the interest rate risk arising from the coupons of the hedged securities. OTP Bank does not intend to be exposed to the risk embedded in the structured bonds, consequently as part of interest rate swap transaction the structured interest payments are swapped to floating interest rate. This hedging relationship meets all of the following hedge effectiveness requirements: • • • there is an economic relationship between the hedged item and the hedging instrument the effect of credit risk does not dominate the value changes that result from that economic relationship the hedge ratio of the hedging relationship is the same as that resulting from the quantity of the hedged item that the Bank actually hedges and the quantity of the hedging instrument that the Bank actually uses to hedge that quantity of hedged item The cash-flows of the fixed rate securities issued by the Bank are exposed to the changes in the HUF/EUR foreign exchange rate and the volatility of the quoted interest rates of EUR and HUF. The interest rate risk and foreign exchange risk related to these securities are hedged with EUR and HUF IRS transactions, where the fixed interests were swapped to payments linked to 3 month HUF BUBOR and EURIBOR, resulting in a decrease in the interest rate and foreign exchange exposure of issued securities. Issued securities denominated in foreign currency as at 31 December 2022. Name Date of issuance Maturity Currency Nominal value in FX million Nominal value in HUF million Amortised cost in FX million Amortised cost in HUF million Interest conditions (in % actual) 1 XS2560693181 2 XS2499691330 01/12/2022 13/07/2022 04/03/2026 13/07/2025 3 XS2536446649 29/09/2022 29/09/2026 EUR EUR USD 650 399 60 260,136 159,859 22,541 653 409 61 261,341 variable 7.35 163,893 variable 5.50 22,972 variable 7.25 Subtotal issued securities in foreign currency 1,109 442,536 1,124 448,206 INTEGRATED ANNUAL REPORT 2022 257 OTP BANK IFRS REPORT (SEPARATE) NOTE 20: LIABILITIES FROM ISSUED SECURITIES (in HUF mn) [continued] Issued securities denominated in HUF as at 31 December 2022 Name Date of issuance Maturity Nominal value in HUF million Amortised cost in HUF million Interest conditions Hedged 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 OTP_HUF_25/1 11/18/2022 11/18/2025 OTP_HUF_26/1 12/22/2022 1/5/2026 OTPRF2023A 3/22/2013 3/24/2023 OTP_DK_25/3 5/31/2021 5/31/2025 OTP_DK_23/II 5/29/2020 5/31/2023 OTP_DK_24/3 5/31/2021 5/31/2024 OTP_DK_27/3 3/31/2022 5/31/2027 OTP_DK_27/II 5/31/2021 5/31/2027 OTP_DK_23/I 12/15/2018 5/31/2023 OTP_DK_26/II 5/31/2021 5/31/2026 OTP_DK_26/3 3/31/2022 5/31/2026 OTP_DK_28/I 5/31/2021 5/31/2028 OTP_DK_24/II 5/29/2020 5/31/2024 OTP_DK_25/II 5/29/2020 5/31/2025 OTP_DK_24/I 5/30/2019 5/31/2024 OTPX2023A 3/22/2013 3/24/2023 OTP_DK_28/II 3/31/2022 5/31/2028 OTP_DK_26/I 5/29/2020 5/31/2026 OTP_DK_29/II 3/31/2022 5/31/2029 OTP_DK_30/II 3/31/2022 5/31/2030 OTP_DK_29/I 5/31/2021 5/31/2029 OTPX2024B OTPX2024A OTPX2024C OTPX2023B 10/10/2014 10/16/2024 6/18/2014 6/21/2024 12/15/2014 12/20/2024 6/28/2013 6/26/2023 OTP_DK_31/I 3/31/2022 5/31/2031 OTP_DK_25/I 5/30/2019 5/31/2025 OTP_DK_27/I 5/29/2020 5/31/2027 OTP_DK_30/I 5/31/2021 5/31/2030 OTP_DK_32/I 3/31/2022 5/31/2032 Other 25,562 10,229 1,010 1,215 997 883 1,092 795 717 707 783 669 592 592 426 312 554 392 554 554 403 295 241 242 198 384 104 95 104 105 211 26,046 indexed 10,270 indexed 1,215 indexed 1,160 discount 15.00 12.00 1.70 hedged 992 862 826 719 710 658 631 586 581 572 411 410 394 372 372 350 341 378 310 309 260 228 97 88 85 59 discount discount discount discount discount discount discount discount discount discount discount indexed discount discount discount discount discount indexed indexed indexed indexed discount discount discount discount discount 211 indexed hedged 0.70 1.30 0.60 0.60 hedged hedged hedged hedged Subtotal issued securities in HUF 51,017 50,503 Total 493,553 498,709 INTEGRATED ANNUAL REPORT 2022 258 OTP BANK IFRS REPORT (SEPARATE) NOTE 20: LIABILITIES FROM ISSUED SECURITIES (in HUF mn) [continued] Issued securities denominated in HUF as at 31 December 2021 Name Date of issuance Maturity Nominal value in HUF million Amortised cost in HUF million Interest conditions Hedged 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 OTP_DK_22/II 5/29/2020 5/31/2022 OTPRF2022A 3/22/2012 3/23/2022 OTP_DK_25/3 5/31/2021 5/31/2025 OTPRF2022B 3/22/2012 3/23/2022 OTP_DK_22/I 12/15/2018 5/31/2022 OTP_DK_23/II 5/29/2020 5/31/2023 OTPRF2023A 3/22/2013 3/24/2023 OTPRF2022E 10/29/2012 10/31/2022 OTP_DK_24/3 5/31/2021 5/31/2024 OTPRF2022F 12/28/2012 12/28/2022 OTP_DK_27/II 5/31/2021 5/31/2027 OTP_DK_23/I 12/15/2018 5/31/2023 OTP_DK_26/II 5/31/2021 5/31/2026 OTP_DK_24/II 5/29/2020 5/31/2024 OTP_DK_28/I 5/31/2021 5/31/2028 OTP_DK_25/II 5/29/2020 5/31/2025 OTPX2022B 7/18/2012 7/18/2022 OTP_DK_24/I 5/30/2019 5/31/2024 OTP_DK_26/I 5/29/2020 5/31/2026 OTPX2023A 3/22/2013 3/24/2023 OTPX2024B 10/10/2014 10/16/2024 OTP_DK_29/I 5/31/2021 5/31/2029 OTPRF2022D 6/28/2012 6/28/2022 OTPX2022C 10/29/2012 10/28/2022 OTPX2022D 12/28/2012 12/27/2022 OTPX2024A 6/18/2014 6/21/2024 OTPX2024C 12/15/2014 12/20/2024 OTPX2023B 6/28/2013 6/26/2023 OTPRF2022C 6/28/2012 6/28/2022 OTPX2022A 3/22/2012 3/23/2022 OTP_DK_25/I 5/30/2019 5/31/2025 OTP_DK_27/I 5/29/2020 5/31/2027 OTP_DK_30/I 5/31/2021 5/31/2030 Other 3,173 2,321 1,216 934 993 997 899 862 883 708 795 717 707 592 669 592 164 426 392 312 295 403 286 177 238 241 242 198 209 175 104 95 104 211 3,164 discount 2,513 indexed 1.70 hedged 1,138 discount 1,011 indexed 1.70 hedged discount discount indexed indexed discount 1.70 1.70 hedged hedged indexed 1.70 hedged discount discount discount discount discount discount indexed 1.70 hedged discount discount indexed indexed discount indexed indexed indexed indexed indexed indexed indexed indexed discount discount discount 1.70 0.70 1.70 1.70 1.70 1.30 0.60 0.60 1.70 - hedged hedged hedged hedged hedged hedged hedged hedged hedged hedged 985 981 977 933 848 773 703 694 644 573 572 564 549 400 366 366 336 332 324 317 290 277 275 272 266 236 94 87 82 211 Subtotal issued securities in HUF 21,330 22,153 Total 21,330 22,153 INTEGRATED ANNUAL REPORT 2022 259 OTP BANK IFRS REPORT (SEPARATE) NOTE 21: FINANCIAL LIABILITIES DESIGNATED AS FAIR VALUE THROUGH PROFIT OR LOSS (in HUF mn) Within one year: In HUF Over one year: In HUF Total Contractual amount outstanding 2022 1,716 1,716 14,860 14,860 16,576 19,853 2021 1,784 1,784 18,349 18,349 20,133 21,479 Interest rates on financial liabilities designated as fair value through profit or loss are as follows (%): Within one year: In HUF Over one year: In HUF 2022 2021 2,19-3.96% 0.46% - 2.46% 0,01%-4.63% 0.01% - 2.9% Average interest on amounts due to banks in HUF 3.06% 2.15% Certain MFB refinanced loan receivables are categorised as fair value through profit or loss based on SPPI test. Related refinancing loans at the liability side are categorised as fair value through profit or loss based on fair value option due to accounting mismatch as provided by the IFRS 9 standard. NOTE 22: HELD FOR TRADING DERIVATIVE FINANCIAL LIABILITIES (in HUF mn) Negative fair value of held for trading derivative financial liabilities by deal types: Interest rate swaps Foreign currency swaps CCIRS and mark-to-market CCIRS Other derivative contracts Total 2022 2021 221,647 87,988 15,711 48,055 373,401 78,066 45,884 7,786 60,525 192,261 NOTE 23: FAIR VALUE OF DERIVATIVE FINANCIAL LIABLITIES DESIGNATED AS HEDGE ACCOUNTING (in HUF mn) Fair value of derivative financial liabilities designated as hedge accounting is detailed as follows: IRS designated as fair value hedge CCIRS designated as fair value hedge IRS designated as cash flow hedge Total 2022 22,551 5,398 22,674 50,623 2021 5,747 5,325 7,618 18,690 INTEGRATED ANNUAL REPORT 2022 260 OTP BANK IFRS REPORT (SEPARATE) NOTE 24: OTHER LIABILITIES1 AND PROVISIONS (in HUF mn) Other financial liabilities Liabilities from investment services Accrued expenses Accounts payable Liabilities due to short positions Liabilities from customer's credit card payments Other Other financial liabilities total Other non-financial liabilities Technical accounts Current income tax payable Social contribution Accrued expenses Other Other non-financial liabilities total 2022 2021 108,284 21,183 27,127 24,596 52,274 25,007 258,471 32,338 12,371 5,275 2,829 1,904 54,717 87,582 27,546 18,754 16,904 14,574 11,383 176,743 41,186 10,080 4,516 3,062 2,850 61,694 Other liabilities total 313,188 238,437 The provision on other liabilities, off-balance sheet commitments and contingent liabilities are detailed as follows: Provision for losses on other off-balance sheet commitments and contingent liabilities Provisions in accordance with IFRS 9 Provision for litigation Provision for retirement pension and severance pay Provision on other liabilities Provisions in accordance with IAS 37 Total 2022 2021 23,632 23,632 1,917 1,527 2,580 6,024 29,656 17,768 17,768 259 975 2,525 3,759 21,527 Movements in the provision for losses on commitments and contingent liabilities in accordance with IFRS 9 can be summarized as follows: Opening balance Provision for the period Release of provision for the period FX revaluation Closing balance 2022 2021 17,768 49,698 (44,157) 323 23,632 17,490 47,626 (47,496) 148 17,768 Movements in the provision for losses on commitments and contingent liabilities in accordance with IAS 37 can be summarized as follows: Opening balance Provision for the period Release of provision Use of provision FX revaluation Closing balance 2022 3,759 8,128 (933) (5,138) 208 6,024 2021 2,416 14,286 (11,608) (1,335) - 3,759 1 Other liabilities are expected to be recovered or settled no more than twelve months after the reporting period. INTEGRATED ANNUAL REPORT 2022 261 OTP BANK IFRS REPORT (SEPARATE) NOTE 25: SUBORDINATED BONDS AND LOANS (in HUF mn) Within one year In foreign currency Over one year: In foreign currency Total Interest rates on subordinated bonds and loans are as follows (%): 2022 2021 3,395 3,395 2,841 2,841 290,791 290,791 268,935 268,935 294,186 271,776 2022 2021 Subordinated bonds and loans denominated in foreign currency 2.9%-4.7% 2.5%-2.9% Average interest on subordinated bonds and loans denominated in foreign currency 3.06% 2.74% Subordinated loans and bonds are detailed as follows as at 31 December 2022: Type Subordinated bond Nominal value EUR 231 million Date of issuance 7 November 2006 Date of maturity Issue price Perpetual 99.375% Subordinated bond EUR 499 million 15 July 2019 15 July 2029 99.738% Interest conditions Three-month EURIBOR + 3%, variable (payable quarterly) Fixed 2.875% annual in the first 5 years and callable after 5 years, variable after year 5 (payable annually) calculated as a sum of the initial margin (320 basis point) and the 5 year mid-swap rate prevailing at the and of the 5 year. Current interest rate 4.742% 2.875% NOTE 26: SHARE CAPITAL (in HUF mn) Authorized, issued and fully paid: Ordinary shares 2022 2021 28,000 28,000 The nominal value of the shares is HUF 100 per shares. All of the shares are ordinary shares representing the same rights to the shareholders. Furthermore there are no restrictions on the distribution of dividends and the repayment of capital. INTEGRATED ANNUAL REPORT 2022 262 OTP BANK IFRS REPORT (SEPARATE) NOTE 27: RETAINED EARNINGS AND RESERVES (in HUF mn) Based on the instructions of Act C of 2000 on accounting (“Act on Accounting”) financial statements of the Bank are prepared in accordance with IFRS as issued by the IASB as adopted by the EU. In 2021, the Bank did not pay dividend based on the earlier NBH warnings issued due to covid moratoria. In 2022 dividend of HUF 119 billion from the profit of the years 2019 and 2020 and HUF 1 billion from the profit of the year 2021 (totally HUF 120 billion) was paid, which means HUF 425,89 (for the year 2019 and 2020) and HUF 3,57 (for the year 2021) dividend per share payable to shareholders. In 2023 dividend of HUF 84,000 million are expected to be proposed by the Management from the profit of the year 2022, which means HUF 300 dividend per share payable to the shareholders. Based on paragraph 114/B of Act on Accounting Equity Correlation Table is prepared and disclosed as a part of the explanatory notes for the reporting date by the Bank. Equity correlation table shall contain the opening and closing balances of the shareholder’s equity in accordance with IFRS, furthermore deducted from this the opening and closing balances of the specified equity elements. Equity correlation table shall contain also untied retained earnings available for the payment of dividends, covering retained earnings from the last financial year for which accounts have been adopted comprising net profit for the period of that financial year minus cumulative unrealized gains claimed in connection with any increase in the fair value of investment properties, as provided in IAS 40 - Investment Property, reduced by the cumulative income tax accounted for under IAS 12 - Income Taxes. Share capital Share capital is the portion of the Bank’s equity that has been obtained by the issue of shares in the corporation to a shareholder, usually for cash. Share-based payment reserve Share-based payment reserve represents the increase in the equity due to the goods or services were received by the Bank in an equity-settled share-based payment transaction, valued at the fair value of the goods or services received. Retained earnings Profit of previous years generated by the Bank that are not distributed to shareholders as dividends. Put option reserve OTP Bank Plc. and MOL Plc. entered into a share swap agreement in 16 April 2009, whereby OTP has changed 24,000,000 OTP ordinary shares for 5,010,501 „A series” MOL shares. The amended final maturity of the share swap agreement is 11 July 2027, until which any party can initiate cash or physical settlement of the transaction. Put option reserve represents the written put option over OTP ordinary shares were accounted as a deduction from equity at the date of OTP-MOL share swap transaction. Other comprehensive income Other comprehensive income comprises items of income and expense (including reclassification adjustments) that are not recognised in profit or loss as required or permitted by other IFRSs. General reserve The Bank shall place ten per cent of the after-tax profit of the year into general reserve prescribed by the Act CCXXXVII of 2013 on Credit Institutions and Financial Enterprises. The Bank is allowed to use general reserves only to cover operating losses arising from their activities. Tied-up reserve The tied-up reserve shall consist of sums tied up from the capital reserve and from the retained earnings. INTEGRATED ANNUAL REPORT 2022 263 OTP BANK IFRS REPORT (SEPARATE) NOTE 27: RETAINED EARNINGS AND RESERVES (in HUF mn) [continued] The equity correlation table of the Bank based on paragraph 114/B of Act on Accounting as at 31 December 2022: 31 December 2022 Closing balance Components of Shareholder’s equity in accordance with IFRS Unused portion of for reserve developments Other comprehensive income Portion of supplementary payment recognised as an asset Option reserve Treasury shares Share based payments Net profit for the year General reserve Components of Shareholder’s equity in accordance with paragraph 114/B of Act on Accounting Share Capital Capital reserve Share-based payment reserve Retained earnings and reserves Option reserve Treasury Shares Revaluation reserve Tied-up reserve Net profit for the year Total 28,000 52 49,110 1,661,907 (55,468) (2,724) - - - - - - - - - - - (55,468) (2,724) 49,110 - - 28,000 (9,030) - - - - - (49,110) - - - - 52,933 - - - - (6,632) (118,568) 1,589,640 - - - 55,468 - - - - - - - - - 2,724 - - - - - - (52,933) - - - - - - - - - - - - - - 118,568 - - - - - - - 6,632 - 1,680,877 - - - - - - - - (52,933) 118,568 6,632 1,680,877 INTEGRATED ANNUAL REPORT 2022 264 OTP BANK IFRS REPORT (SEPARATE) NOTE 27: RETAINED EARNINGS AND RESERVES (in HUF mn) [continued] The equity correlation table of the Bank based on paragraph 114/B of Act on Accounting as at 1 January 2022: 1 January 2022 Opening balance Share Capital Capital reserve Share-based Retained earnings Option reserve Treasury Shares payment reserve and reserves 28,000 52 46,162 1,855,090 (55,468) (58,872) Components of Shareholder’ s equity in accordance with IFRS Unused portion of for reserve developments Other comprehensiv e income Portion of supplementary payment recognised an asset Option reserve Treasury shares Share based as payments Net profit for the year General reserve Components of Shareholder’ s equity in accordance with paragraph 114/B of Act on Accounting - - - - - - - - - - - (55,468) (58,872) - - - - - 46,162 (46,162) (497) (5,078) - - - - - - - - (125,339) (117,905) Revaluation reserve Tied-up reserve Net profit for the year Total - - 5,078 - - - - - - - 497 - - - - - - - - - - - - - 125,339 117,905 - 1,814,964 - - - - - - - - 5,078 118,402 125,339 1,814,964 - - - - - - 55,468 - - 58,872 - - - - - - - 28,000 (68,126) - 1,606,271 - INTEGRATED ANNUAL REPORT 2022 265 OTP BANK IFRS REPORT (SEPARATE) NOTE 27: RETAINED EARNINGS AND RESERVES (in HUF mn) [continued] Calculated untied retained earnings in accordance with paragraph 114/B of Act on Accounting Retained earnings Net profit for the year Untied retained earnings 2022 1,589,640 6,632 1,596,272 20 1,606,2 125,339 1,731,6 Items of retained earnings and other reserves Retained earnings Capital reserve Option reserve Other reserves Fair value of financial instruments measured at fair value through other comprehensive income Share-based payment reserve Fair value of derivative financial instruments designated as cash-flow hedge Net profit for the period Retained earnings and other reserves 2022 1,580,770 52 (55,468) 127,438 (43,723) 49,110 (9,210) 6,632 1,655,601 Fair value adjustment of securities at fair value through other comprehensive income Balance as at 1 January Change of fair value correction Deferred tax related to change of fair value correction Other transfer to retained earnings Deferred tax related to other transfer to retained earnings Closing balance 2022 145 (88,350) 5,299 - - (82,906) Expected credit loss on securities at fair value through other comprehensive income 2021 1,606,770 52 (55,468) 117,903 8,646 46,162 (3,568) 125,339 1,845,836 2021 36,441 (34,484) 2,801 (5,070) 457 145 Balance as at 1 January Increase of loss allowance Release of loss allowance Fx movement Closing balance 2022 1,174 33,946 (8,331) 2,372 29,161 Fair value changes of equity instruments as at fair value through other comprehensive income Balance as at 1 January Change of fair value correction Deferred tax related to change of fair value correction Closing balance 2022 7,327 3,631 (936) 10,022 2021 1,714 1,103 (1,654) 11 1,174 2021 6,201 1,407 (281) 7,327 INTEGRATED ANNUAL REPORT 2022 266 OTP BANK IFRS REPORT (SEPARATE) NOTE 28: TREASURY SHARES (in HUF mn) Nominal value (ordinary shares) Carrying value at acquisition cost 2022 35 2,724 2021 325 58,872 The changes in the carrying value of treasury shares are due to repurchase and sale transactions on market authorised by the General Assembly. Change in number of shares: Number of shares as at 1 January Additions Disposals Number of shares at the end of the period Change in carrying value: Balance as at 1 January Additions Disposals Closing Balance Face value of treasury shares held by OTP Group members 2022 2021 3,249,984 1,801,256 (4,698,896) 352,344 4,331,169 16,251,451 (17,332,636) 3,249,984 2022 2021 58,872 16,268 (72,416) 2,724 46,799 276,433 (264,360) 58,872 2022 1,097 2021 766 INTEGRATED ANNUAL REPORT 2022 267 OTP BANK IFRS REPORT (SEPARATE) NOTE 29: INTEREST INCOME AND EXPENSES (in HUF mn) Interest income accounted for using the effective interest rate method from / on Loans at amortised cost FVOCI securities Securities at amortised cost Placements with other banks Financial liabilities Amounts due from banks and balances with National Bank of Hungary Repo receivables Subtotal Income similar to interest income Loans mandatorily measured at fair value through profit or loss Swap and forward deals related to Placements with other banks Swap and forward deals related to Loans at amortised cost Swap and forward deals related to FVOCI securities Investment properties Subtotal 2022 2021 297,727 39,988 92,948 204,479 20,098 56,204 10,235 721,679 35,927 273,322 60,744 7,230 8 377,231 168,388 21,456 61,085 33,544 3,337 14,245 318 302,373 26,045 68,975 11,487 (850) 6 105,663 Interest income total 1,098,910 408,036 Interest expense due to / from / on Amounts due to banks and deposits from the National Bank of Hungary and other banks Deposits from customers Leasing liabilities Liabilities from issued securities Subordinated bonds and loans Investment properties (deprecation) Financial assets Repo liabilities Swap transaction related to acquisitions Interest expense total 408,865 301,657 1,186 7,742 8,646 135 6,369 66,049 1,371 802,020 107,928 33,403 214 377 7,890 92 2,193 3,394 - 155,491 INTEGRATED ANNUAL REPORT 2022 268 OTP BANK IFRS REPORT (SEPARATE) NOTE 30: RISK COST (in HUF mn) Loss allowance of loans at amortised cost Loss allowance Release of loss allowance Loss allowance of sight deposits and placements with other banks Loss allowance Release of loss allowance Loss allowance of placements with other banks Loss allowance Release of loss allowance Loss allowance of FVOCI securities Loss allowance Release of loss allowance Loss allowance of securities at amortised cost Loss allowance Release of loss allowance Provision on loan commitments and financial guarantees Provision for the period Release of provision Change in the fair value attributable to changes in the credit risk of loans mandatorily measured at fair value through profit of loss Risk cost total 2022 2021 245,183 (211,345) 33,838 32,592 (20,838) 11,754 4,480 (2,385) 2,095 33,946 (8,331) 25,615 31,695 (4,072) 27,623 49,698 (44,157) 5,541 (11,872) 94,594 218,534 (181,270) 37,264 20,709 (18,912) 1,797 449 (669) (220) 1,103 (1,654) (551) 4,404 (2,369) 2,035 47,626 (47,496) 130 16,255 56,710 INTEGRATED ANNUAL REPORT 2022 269 OTP BANK IFRS REPORT (SEPARATE) NOTE 31: NET PROFIT FROM FEES AND COMMISSIONS (in HUF mn) Income from fees and commissions: Fees and commissions related to lending Deposit and account maintenance fees and commissions Fees and commission related to the issued bank cards Fees and commissions related to security trading Fx margin Fees and commissions paid by OTP Mortgage Bank Ltd. Net insurance fee income Other Fees and commissions from contracts with customers Total Income from fees and commissions: Contract balances Receivables, which are included in ‘other assets’ Loss allowance Fee and commission expense Other fees and commissions related to issued bank cards Insurance fees Fees and commissions related to lending Fees and commissions related to security trading Fees and commissions relating to deposits Trust activities related to securities Postal fees Money market transaction fees and commissions Other Total 2022 12,711 146,817 122,138 27,867 26,032 8,819 10,981 7,079 349,733 362,444 2022 15,674 (512) 2022 53,179 783 5,267 789 2,417 2,096 223 166 1,167 66,087 2021 12,164 123,800 89,243 28,227 16,155 11,187 8,481 11,546 288,639 300,803 2021 16,391 (196) 2021 39,835 771 5,011 618 2,610 1,652 224 265 1,290 52,276 Net profit from fees and commissions 296,357 248,527 INTEGRATED ANNUAL REPORT 2022 270 OTP BANK IFRS REPORT (SEPARATE) NOTE 31: NET PROFIT FROM FEES AND COMMISSIONS (in HUF mn) [continued] Performance obligations and revenue recognition policies: Fee type and Deposit account maintenance fees and commissions recognition Revenue under IFRS 15 Fees for ongoing account management services are charged on a monthly basis during the period when they are provided. fees Transaction-based are charged when the transaction takes places or charged monthly at the end of the month. Nature and timing of satisfaction of performance obligations, and the significant payment terms The Bank provides a number of account management services for both retail and corporate customers in which they charge a fee. Fees related to these services can be typically account transaction fees (money transfer fees, direct debit fees, money standing order fees, etc.), internet banking fees (e.g. OTP Direct fee), account control fees (e.g. sms fee), or other fees for occasional services (account statement fees, other administration fees, etc.). Fees for ongoing account management services are charged to the customer’s account on a monthly basis. The fees are commonly fix amounts that can be vary per account package and customer category. In the case of the transaction based fees where the services include money transfer the fee is charged when the transaction takes place. The rate of the fee is typically determined in a certain % of the transaction amount. In case of other transaction-based fees (e.g. SMS fee), the fee is settled monthly. In case of occasional services the Bank basically charges the fees when the services are used by the customer. The fees can be fixed fees or they can be set in %. The rates are reviewed by the Bank regularly. and Fees commission related the to issued bank cards The Bank provides a variety of bank cards to its customers, for which different fees are charged. The fees are basically charged in connection with the issuance of cards and the related card transactions. Fees for ongoing services are charged on a monthly basis during the period when they are provided. The annual fees of the cards are charged in advance in a fixed amount. The amount of the annual card fee depends on the type of card. of fees case transaction-based In cash withdrawal/payment fee, merchant fee, interchange fee, etc.), the settlement of the fees will take place immediately after the transaction or on a monthly basis. The fee is typically determined in % of the transaction with a fixed minimum amount. (e.g. Transaction-based fees the are charged when transaction takes places or charged monthly at the end of the month. For all other cases where the Bank provides a continuous service to the customers (e.g. card closing fee), the fees are charged monthly. The fee is calculated in a fix amount. The rates are reviewed by the Bank regularly. INTEGRATED ANNUAL REPORT 2022 271 OTP BANK IFRS REPORT (SEPARATE) NOTE 31: NET PROFIT FROM FEES AND COMMISSIONS (in HUF mn) [continued] Performance obligations and revenue recognition policies: [continued] Fee type and Fees commissions related to security account management services Nature and timing of satisfaction of performance obligations, and the significant payment terms The Bank provides its clients with security account management services. Fees will be charged for account management and transactions on accounts. Account management fees are typically charged quarterly or annually. The amount is determined in%, based on the stocks of securities managed by the clients on the account in a given period. Fees for transactions on the securities account are charged immediately after the transaction. They are determined in%, based on the transaction amount. Fees for complex services provided to clients (e.g. portfolio management or custody) are typically charged monthly or annually. The fees are fixed monthly amounts and in some cases a bonus fee are charged. Fees and commissions paid by OTP Mortgage Bank Ltd. The Bank provides a number of services to its subsidiaries, in connection with fees are charged. These fees typically include services related to various warranties and guarantees, credit account management, agency activities, and marketing activities. The credit account management fee granted to OTP Mortgage Bank is settled on a monthly basis. It has a fixed part that is based on the number of the managed credit accounts, and a variable one determined by the profit split method. The fees for the guarantee services provided by the Bank are charged monthly. The fee is determined by% and based on the stock being guaranteed. Fees for agent services are charged monthly. The rate is %, based on the products sold during the period. recognition Revenue under IFRS 15 Fees for ongoing services are charged quarterly or annually during the period when they are provided. The fees are accrued monthly. Transaction-based are charged when transaction takes places. fees the Fees for ongoing services are charged on a monthly basis during the period when they are provided. Transaction-based are charged when transaction takes places. fees the Net insurance fee income Due to the fact that the Bank does not provide insurance services to its clients, only acts as an agent, the fee income charged to the customers and fees payable to the insurance company are presented net in the fee income. Fees for ongoing services are charged on a monthly basis during the period when they are provided. Other In addition, agency fee charged for the sale of insurance contracts is also recorded in this line. The fee is charged on a monthly basis and determined in %. Fees that are not significant in the Banks total income are included in Other fees category. Such fees are safe lease, special procedure fee, account rent fee, adlak service fee, fee of a copy of document, etc. Other fees may include charges for continuous services or for ad hoc administration services. Continuous fees are charged monthly (e.g., safe lease fees) at the beginning of the period, typically at a fixed rate. Fees for ad hoc services are charged immediately after the service obligation had been met, typically also in a fixed amount. Fees for ongoing services are charged on a monthly basis during the period when they are provided. Fees for ad hoc services are charged when the transaction takes places. INTEGRATED ANNUAL REPORT 2022 272 OTP BANK IFRS REPORT (SEPARATE) NOTE 32: GAINS AND LOSSES (in HUF mn) Losses arising from derecognition of financial assets measured at amortised cost Gain from loans Loss from loans Gain from securities Loss from securities Other Total Additional information to Gains or losses from operating income: Foreign exchange gains and (losses) Gains from foreign exchange Loss from foreign exchange Margin gains Margin losses Total instruments and hedge Net results on derivative relationships Gains on FX spot, swap and option deals Losses from FX spot, swap and option deals Fees received related to option deals Fees paid related to option deals Gains on commodity deals Losses from commodity deals Gains on futures transactions Losses from futures transactions Losses from credit valuation adjustment related to FX spot, swap and option deals held for trading Losses from credit valuation adjustment related to commodity deals held for trading Total Losses on financial instruments at fair value through profit or loss Gains on securities mandatorily measured at fair value through profit or loss Gains on loans mandatorily measured at fair value through profit or loss Losses on loans mandatorily measured at fair value through profit or loss Gains on financial liabilities designated at fair value through profit or loss Losses on financial liabilities designated at fair value through profit or loss Total 2022 2021 485 (1,881) - (54,402) (397) (56,195) 93 (818) 968 (2,520) (423) (2,700) 2022 2021 6,857 - 8,400 (14,716) 541 - (5,875) 3,597 (3,360) (5,638) 2022 2021 76,709 (67,882) 4,111 (5,073) 134,949 (132,288) 687 (402) 41,224 (34,716) 2,203 (2,830) 91,487 (91,474) 580 (208) (1,059) (2,643) 165 9,917 2022 (187) 3,436 2021 2,688 2,285 21,205 12,069 (44,614) (24,764) 4,509 4,354 (2,578) (18,790) (438) (6,494) INTEGRATED ANNUAL REPORT 2022 273 OTP BANK IFRS REPORT (SEPARATE) NOTE 32: GAINS AND LOSSES (in HUF mn) [continued] Additional information to Gains or losses from operating income: [continued] (Losses) and gains on securities, net Interest income from held for trading securities Gains on held for trading securities Losses on held for trading securities Gains on FVOCI securities Losses on FVOCI securities Gains on derecognition of investments in subsidiaries Losses on derecognition of investments in subsidiaries Gains/losses from other securities Total Dividend income Distribution from investments in subsidiaries Distribution from held for trading securities Distribution from FVOCI equity instruments Total Total gains and losses from operating income (without other operating income) 2022 3,556 11,599 (7,806) 8 (7,960) - - (10,002) (10,605) 2021 277 8,018 (3,646) 2,138 (6,797) 1,311 (1,963) 2,766 2,104 2022 2021 182,153 12,166 207 194,526 95,042 3,844 151 99,037 175,589 92,445 For the year ended 31 December 2022 gains and losses attributable to the hedged risk on the hedged item and on the hedging instruments and also ineffectiveness in case of fair value hedge on amortised cost line items as follows Hedged items Hedging instrument Hedge ineffectiveness Fair value hedge 6,750 (9,352) (2,602) For the year ended 31 December 2021 gains and losses attributable to the hedged risk on the hedged item and on the hedging instruments and also ineffectiveness in case of fair value hedge on amortised cost line items as follows Hedged items Hedging instrument Hedge ineffectiveness Fair value hedge 17,406 (15,147) 2,259 NOTE 33: OTHER OPERATING INCOME AND EXPENSES AND OTHER ADMINISTRATIVE EXPENSES (in HUF mn) Other operating income 2022 2021 Other operating income from OTP Employee Stock Ownership Program (OTP ESOP) Intermediary and other services Income from lease of tangible assets Gains on IT services provided to subsidiaries Derecognition of financial liabilities at amortised cost Non-repayable assets received Gains on sale of tangible assets Income from written off receivables Gains on transactions related to property activities Gains on sale of receivables Other Total 4,429 2,716 1,186 1,021 985 443 267 249 237 - 2,242 13,775 2,234 2,272 1,009 940 2,290 1,174 (81) 281 239 - 907 11,265 INTEGRATED ANNUAL REPORT 2022 274 OTP BANK IFRS REPORT (SEPARATE) NOTE 33: OTHER OPERATING INCOME AND EXPENSES AND OTHER ADMINISTRATIVE EXPENSES (in HUF mn) [continued] Other operating expenses 2022 2021 Income from receivable related to NDIF extraordinary payment Non-repayable assets contributed Release of provision for off-balance sheet commitments and contingent liabilities Release of loss allowance on other assets Financial support for sport association and organization of public utility Release of loss allowance/(Loss allowance) on investments in subsidiaries Other Total Other administrative expenses: Personnel expenses: Wages Taxes related to personnel expenses Other personnel expenses Subtotal Depreciation and amortization Other administrative expenses: Taxes, other than income tax Services Fees payable to authorities and other fees Administration expenses, including rental fees Professional fees Advertising Subtotal Total 16,037 (1,397) (2,057) (2,939) (16,344) (93,513) (15,692) (131,942) 2022 110,646 16,460 27,197 154,303 46,738 167,834 74,383 21,674 7,477 9,320 10,301 290,989 492,030 - (862) (1,343) 961 (10,960) (27,420) (2,012) (41,636) 2021 105,176 16,709 14,241 136,126 40,692 81,171 57,290 17,362 7,439 6,714 8,635 178,611 355,429 NOTE 34: INCOME TAX (in HUF mn) The Bank is presently liable for income tax at a rate of 9% of taxable income, local taxes at a rate of 2.3% of taxable revenue. A breakdown of the income tax expense is: Current tax expense Deferred tax (benefit)/expense Total 2022 18,026 (31,664) (13,638) 2021 14,528 1,423 15,951 INTEGRATED ANNUAL REPORT 2022 275 OTP BANK IFRS REPORT (SEPARATE) NOTE 34: INCOME TAX (in HUF mn) [continued] A reconciliation of the deferred tax liability is as follows: Balance as at 1 January Deferred tax (expense)/ benefit Tax effect of fair value adjustment of FVOCI securities and ICES recognised in comprehensive income Closing balance A breakdown of the deferred tax liability is as follows: Provision for untaken leave Provision for termination benefits and jubilee Amounts relate to negative tax base Unused tax allowance Fair value adjustment of held for trading and securities at fair value through other comprehensive income Deferred tax asset Fair value adjustment of held for trading and securities at fair value through other comprehensive income Difference in depreciation and amortization Provision for developments Deferred tax liabilities Net deferred tax assets/(liabilities) A reconciliation of the income tax (income) / expense is as follows: Profit before income tax Income tax at statutory tax rate (9%) Income tax adjustments due to permanent differences are as follows: Share-based payment Deferred use of tax allowance Dividend income Use of tax allowance in the current year Amounts unenforceable by tax law Carryforward of unused tax losses Other Income tax Effective tax rate Current tax assets Current tax liabilities Net tax liabilities 2022 (1,507) 31,664 5,585 35,742 2022 323 900 19,424 12,103 4,230 36,980 - (1,193) (45) (1,238) 35,742 2022 -7,006 - 265 43 (17,298) - (182) (1,234) 77 (30,431) 434.4% 2022 1,569 (3,199) (1,630) 2021 (3,062) (1,423) 2,978 (1,507) 2021 282 644 - - - 926 (1,312) (1,076) (45) (2,433) (1,507) 2021 141,290 12,717 323 90 (8,787) (3,461) (847) - 1,618 1,653 1.2% 2021 - (4,776) (4,776) INTEGRATED ANNUAL REPORT 2022 276 OTP BANK IFRS REPORT (SEPARATE) NOTE 35: LEASE (in HUF mn) The Bank as a lessee: Amounts recognised in profit and loss Interest expense on lease liabilities Expense relating to short-term leases Expense relating to variable lease payments not included in the measurement of lease liabilities Leasing liabilities by maturities: Within one year Over one year Total 2022 1,186 1,945 1,386 2022 5,944 35,520 41,464 2021 214 2,143 1,271 2021 4,868 13,064 17,932 An analysis of movement in the carrying amount of right-of-use assets by category is as follows: Gross carrying amount Balance as at 1 January 2021 Additions due to new contracts Derecognition due to matured contracts Change due to revaluation and modification Balance as at 31 December 2021 Additions due to new contracts Derecognition due to matured contracts Change due to revaluation and modification Balance as at 31 December 2022 Depreciation Balance as at 1 January 2021 Depreciation charge Derecognition due to matured contracts Balance as at 31 December 2021 Depreciation charge Derecognition due to matured contracts Balance as at 31 December 2022 Net carrying amount Balance as at 31 December 2021 Balance as at 31 December 2022 Right-of-use of real estate 22,406 5,788 (263) 3,150 31,081 27,206 (3,731) 2,806 57,362 8,952 5,155 (238) 13,869 7,315 (1,804) 19,380 17,212 37,982 Right-of-use of machinery and equipment 37 - - - 37 1,950 - - 1,987 12 6 - 18 69 - 87 19 1,900 Total 22,443 5,788 (263) 3,150 31,118 29,156 (3,731) 2,806 59,349 8,964 5,161 (238) 13,887 7,384 (1,804) 19,467 17,231 39,882 INTEGRATED ANNUAL REPORT 2022 277 OTP BANK IFRS REPORT (SEPARATE) NOTE 36: FINANCIAL RISK MANAGEMENT (in HUF mn) A financial instrument is any contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity. Financial instruments may result in certain risks to the Bank. The most significant risks the Bank faces include: 36.1. Credit risk The Bank takes on exposure to credit risk which is the risk that a counter-party will be unable to pay amounts in full when due. The Bank structures the levels of credit risk it undertakes by placing limits on the amount of risk accepted in relation to one borrower, or banks of borrowers, and to geographical areas and loan types. Such risks are monitored on a periodical basis and subject to an annual or more frequent review. The exposure to any borrower including banks and brokers is further restricted by sublimit covering on- and off-balance sheet exposures and daily delivery risk limits in relation to trading items such as forward foreign exchange contracts. Actual exposures against limits are monitored daily. Exposure to credit risk is managed through regular analysis of the ability of borrowers and potential borrowers to meet interest and capital repayment obligations and by changing these lending limits when appropriate. Exposure to credit risk is partly managed obtaining collateral, corporate and personal guarantees. 36.1.1. Financial instruments by stages Defining the expected credit loss on individual and collective basis On individual basis: Individually assessed are the non-retail or micro- and small enterprise exposure of significant amount on a stand- alone basis: • • • exposure in stage 3, exposure in workout management purchased or originated credit-impaired instruments which are in accordance with the conditions mentioned above The calculation of impairment must be prepared and approved by the risk management functional areas. The calculation, all relevant factors (amortised cost, original and current EIR, contracted and expected cash flows (from business and/or collateral) for the individual periods of the entire lifecycle, other essential information enforced during the valuation) and the criteria thereof (including the factors underlying the classification as stage 3) must be documented individually. The expected credit loss of the exposure equals the difference of the receivable's AC (gross book value) on the valuation date and the present value of the receivable's expected cash flows discounted to the valuation date by the exposure's original effective interest rate (EIR) (calculated at the initial recognition, or in the case of variable rate, recalculated due to the last interest rate change). The estimation of the expected future cash flows should be forward looking, it must also contain the effects of the possible change of macroeconomic outlook. At least two scenarios must be used for the estimation of the expected cash flow. At least one scenarios should anticipate that realised cash flows will be significantly different from the contractual cash flows. Probability weights must be allocated to the individual scenarios. The estimation must reflect the probability of the occurrence and non-occurrence of the credit loss, even if the most probable result is the non-occurrence of the loss. On collective basis: The following exposures are subject to collective assessment: retail exposure irrespective of the amount, • • micro and small enterprise exposures irrespective of the amount, • • • all other exposure which are insignificant on a stand-alone basis and not part of the workout management, exposure which are not in stage 3, significant on a stand-alone basis, purchased or originated credit-impaired instruments which are in accordance with the conditions mentioned above. INTEGRATED ANNUAL REPORT 2022 278 OTP BANK IFRS REPORT (SEPARATE) NOTE 36: FINANCIAL RISK MANAGEMENT (in HUF mn) [continued] 36.1. Credit risk [continued] 36.1.1. Financial instruments by stages [continued] In the collective impairment methodology credit risk and the change of credit risk can be correctly captured by understanding the risk characteristics of the portfolio. In order to achieve this the main risk drivers shall be identified and used to form homogeneous segments having similar risk characteristics. The segmentation is expected to stay stable from month to month however a regular (at least yearly) revision of the segmentation process should be set up to capture the change of risk characteristics. The segmentation must be performed separately for each parameter, since in each case different factors may have relevance. The Bank's Headquarters Group Reserve Committee stipulates the guidelines related to the collective impairment methodology at group level. In addition, it has right of agreement in respect of the risk parameters (PD -probability of default, LGD - loss given default, EAD – exposure at default) and segmentation criteria proposed by the group members. The review of the parameters must be performed at least annually and the results should be approved by the Group Reserve Committee. Local Risk Managements is responsible for parameter estimations and updates, macroeconomic scenarios are calculated by OTP Bank Headquarters for each subsidiary and each parameter. Based on the consensus proposal of Local Risk Management and OTP Bank Headquarters, the Group Reserve Committee decides on the modification of parameters (all parameters for impairment calculation). The impairment parameters should be backtested at least annually. The expected loss calculation should be forward looking, including forecasts of future economic conditions. This may be achieved by applying 3-5 different macroeconomic scenarios, which may be integrated in the PD, LGD and EAD parameters. INTEGRATED ANNUAL REPORT 2022 279 OTP BANK IFRS REPORT (SEPARATE) NOTE 36: FINANCIAL RISK MANAGEMENT (in HUF mn) [continued] 36.1. Credit risk [continued] 36.1.1. Financial instruments by stages [continued] Gross carrying amount and accumulated loss allowance of financial assets at amortized cost and fair value through other comprehensive income by IFRS 9 stages as at 31 December 2022: Cash, amounts due from banks and balances with the National Bank of Hungary Placements with other banks Repo receivables Retail consumer loans Mortgage loans Municipal loans Corporate loans Loans at amortised cost FVOCI securities Securities at amortised cost Other financial assets Total as at 31 December 2022 Loan commitments Financial guarantees Factoring loan commitments Bill of credit Loan commitments and financial guarantees total Carrying amount/ Exposure 1,092,198 2,899,829 246,529 556,062 62,587 81,083 4,125,308 4,825,040 797,175 3,282,373 255,125 13,398,269 1,840,521 1,863,476 371,866 12,285 Gross carrying amount / Notional amount Loss allowance Stage 1 Stage 2 Stage 3 Purchased or originated credit impaired Total Stage 1 Stage 2 Stage 3 Purchased or originated credit impaired Total Write-off 45,912 81,856 31,305 1,062,246 2,906,852 10,247 - - 1,512 248,696 - 507,517 65,853 52,913 7,039 8,895 - 286 3,541,098 589,153 86,401 4,176,383 664,187 146,353 - 27,415 6,713 38,270 4,600 5,330 12,689,378 717,782 218,150 769,760 3,273,240 252,201 1,745,003 101,644 1,848,783 24,868 5,517 173 327,903 14,705 30,809 - 12,128 247 - - - 2 2,279 - 10,716 12,997 - - 20 13,017 - - - - - 57 1,010 872 1,233 - 481 1,093,551 2,918,611 16,037 2,167 - 1,512 248,696 - 626,285 15,229 17,670 37,323 1,116 64,125 - 82,142 4,227,368 22,068 39,153 39,334 4,999,920 38,364 57,051 77,773 - 24,399 300 13,804 2,121 13,638,327 85,504 62,400 119,609 4,762 3,318,223 21,746 1,947 179 49 262,151 797,175 2,944 186 - 1,353 - - 18,782 - 2,167 1 70,223 1,538 1,059 1,505 102,060 1,692 174,880 - 29,161 - 35,850 7,026 1,706 269,219 14 1,852,164 1,873,824 373,417 12,375 6,694 9,502 361 85 3,581 800 87 5 1,368 46 1,103 - 4,111,780 16,642 4,473 2,517 - 11,643 - 10,348 1,551 - 90 - - 23,632 - - - - - - 25,879 25,879 - - - 25,879 - - - - - 4,088,148 3,933,817 141,464 36,499 INTEGRATED ANNUAL REPORT 2022 280 OTP BANK IFRS REPORT (SEPARATE) NOTE 36: FINANCIAL RISK MANAGEMENT (in HUF mn) [continued] 36.1. Credit risk [continued] 36.1.1. Financial instruments by stages [continued] Gross carrying amount and accumulated loss allowance of financial assets at amortized cost and fair value through other comprehensive income by IFRS 9 stages as at 31 December 2021: Gross carrying amount / Notional amount Loss allowance Cash, amounts due from banks and balances with the National Bank of Hungary Placements with other banks Repo receivables Retail consumer loans Mortgage loans Municipal loans Corporate loans Loans at amortised cost FVOCI securities Securities at amortised cost Other financial assets Total as at 31 December 2021 Loan commitments Financial guarantees Factoring loan commitments Bill of credit Loan commitments and financial guarantees total Carrying amount/ Exposure 474,945 2,567,212 33,638 598,699 81,471 71,328 3,280,967 4,032,465 641,939 3,071,038 153,748 10,974,985 1,665,288 1,500,977 423,267 30,380 Stage 1 Stage 2 Stage 3 Purchased or originated credit impaired Total Stage 1 Stage 2 Stage 3 Purchased or originated credit impaired Write-off Total - - - 475,130 2,573,226 33,710 33,254 39,220 1,346 70,311 - 1,476 - 488,639 139,193 33,687 8,377 - 2,909,439 384,223 66,915 3,501,643 563,982 108,979 - - 735 10,409,322 616,169 111,190 - 3,064,500 13,223 119,174 38,964 641,939 1,615,196 56,838 1,491,470 14,883 5,847 - 412,692 30,381 4,996 244 5,133 - - - - 3 2,724 - 10,691 13,418 - - 23 13,441 - - - - - - - - 25 223 185 6,014 72 - 475,130 1,476 2,574,702 33,710 - 661,522 11,168 27,597 24,056 1,503 83,575 - 71,657 3,371,268 17,945 39,260 31,528 4,188,022 29,361 67,272 57,087 - - 598 11,150,122 44,384 70,915 59,161 641,939 3,077,723 158,896 - 803 2,840 1,174 5,882 1,696 309 106 1,677,030 1,506,597 423,672 30,381 5,620 4,820 228 1 3,968 749 32 - 2,154 51 145 - 3,637,680 10,669 4,749 2,350 - - - 2 267 - 1,568 1,837 - - 14 1,851 - - - - - 185 7,490 72 62,823 2,104 329 90,301 155,557 1,174 6,685 5,148 176,311 11,742 5,620 405 1 17,768 - - - - - - 21,838 21,838 - - - 21,838 - - - - - 3,619,912 3,549,739 77,568 10,373 INTEGRATED ANNUAL REPORT 2022 281 OTP BANK IFRS REPORT (SEPARATE) NOTE 36: FINANCIAL RISK MANAGEMENT (in HUF mn) [continued] 36.1. Credit risk [continued] 36.1.1. Financial instruments by stages [continued] Changes in the Loss allowance of financial assets at amortised cost and fair value through other comprehensive income by IFRS 9 stages Loans at amortised cost Loss allowance as at 1 January 2021 Transfer to Stage 1 Transfer to Stage 2 Transfer to Stage 3 Net remeasurement of loss allowance New financial assets originated or purchased Financial assets derecognised (other than write-offs) Unwind of discount Write-offs Loss allowance as at 31 December 2021 Transfer to Stage 1 Transfer to Stage 2 Transfer to Stage 3 Net remeasurement of loss allowance New financial assets originated or purchased Financial assets derecognised (other than write-offs) Unwind of discount Write-offs Loss allowance as at 31 December 2022 Stage 1 Stage 2 Stage 3 POCI 22,506 12,289 (1,867) (369) (10,705) 65,016 (11,919) 3,241 (5,636) 18,125 33,226 (370) (1,374) 6,005 20,779 1,641 - - - 221 Total 122,389 - - - 28,420 15,197 6,326 4,292 1 25,816 (7,638) - (52) 29,361 13,705 (2,058) (738) (14,906) (7,540) - (341) 67,272 (12,361) 6,779 (6,414) 5,886 (5,323) 947 (1,095) 57,087 (1,344) (4,721) 7,152 23,898 22,665 7,284 6,955 (9,595) - (70) (11,041) - (354) (8,942) 4,899 (7,211) (16) 9 (19) 1,837 - - - (69) 14 (90) 40 (40) (20,517) 956 (1,507) 155,557 - - - 14,809 36,918 (29,668) 4,939 (7,675) 38,364 57,051 77,773 1,692 174,880 INTEGRATED ANNUAL REPORT 2022 282 OTP BANK IFRS REPORT (SEPARATE) NOTE 36: FINANCIAL RISK MANAGEMENT (in HUF mn) [continued] 36.1. Credit risk [continued] 36.1.1. Financial instruments by stages [continued] Changes in the Loss allowance of financial assets at amortised cost and fair value through other comprehensive income by IFRS 9 stages [continued] Loan commitments and financial guarantees Stage 1 Stage 2 Stage 3 Loss allowance as at 1 January 2021 Transfer to Stage 1 Transfer to Stage 2 Transfer to Stage 3 Net remeasurement of loss allowance New financial assets originated or purchased Decrease Loss allowance as at 31 December 2021 Transfer to Stage 1 Transfer to Stage 2 Transfer to Stage 3 Net remeasurement of loss allowance New financial assets originated or purchased Decrease Loss allowance as at 31 December 2022 10,717 2,910 (200) (21) (4,628) 3,215 (1,324) 10,669 2,095 (442) (21) 2,148 3,933 (1,740) 5,820 (2,840) 322 (109) 1,371 904 (719) 4,749 (1,929) 542 (124) 1,020 602 (387) 953 (70) (122) 130 1,500 98 (139) 2,350 (166) (100) 145 1,052 78 (842) Total 17,490 - - - (1,757) 4,217 (2,182) 17,768 - - - 4,220 4,613 (2,969) 16,642 4,473 2,517 23,632 Cash, amounts due from banks and balances with the National Bank of Hungary Stage 1 Stage 2 Total Loss allowance as at 1 January 2021 New financial assets originated or purchased Loss allowance as at 31 December 2021 Net remeasurement of loss allowance New financial assets originated or purchased Financial assets derecognised (other than write- offs) Loss allowance as at 31 December 2022 - 185 185 104 291 (99) 481 - - - 621 251 - 872 - 185 185 725 542 (99) 1,353 Placements with other banks Loss allowance as at 1 January 2021 Net remeasurement of loss allowance New financial assets originated or purchased Financial assets derecognised (other than write-offs) Loss allowance as at 31 December 2021 Transfer to Stage 2 Net remeasurement of loss allowance New financial assets originated or purchased Financial assets derecognised (other than write-offs) Loss allowance as at 31 December 2022 Stage 1 Stage 2 Stage 3 Total 4,356 (303) 4,566 (2,605) 6,014 (71) 1,261 14,166 (5,333) 16,037 2 - - (2) - 71 1,149 13 - 1,233 1,461 15 - - 1,476 - 36 5,819 (288) 4,566 (2,607) 7,490 - 2,446 - 14,179 - 1,512 (5,333) 18,782 INTEGRATED ANNUAL REPORT 2022 283 OTP BANK IFRS REPORT (SEPARATE) NOTE 36: FINANCIAL RISK MANAGEMENT (in HUF mn) [continued] 36.1. Credit risk [continued] 36.1.1. Financial instruments by stages [continued] Changes in the Loss allowance of financial assets at amortised cost and fair value through other comprehensive income by IFRS 9 stages [continued] Repo Receivables Loss allowance as at 1 January 2021 New financial assets originated or purchased Financial assets derecognised (other than write-offs) Loss allowance as at 31 December 2021 New financial assets originated or purchased Financial assets derecognised (other than write-offs) Loss allowance as at 31 December 2022 Securities at amortised cost Stage 1 Total 292 449 (669) 72 4,480 292 449 (669) 72 4,480 (2,385) 2,167 (2,385) 2,167 Loss allowance as at 1 January 2021 Net remeasurement of loss allowance New assets originated or financial purchased Financial assets derecognised (other than write-offs) Loss allowance as at 31 December 2021 Transfer to Stage 3 Net remeasurement of loss allowance New assets originated or financial purchased Financial assets derecognised (other than write-offs) Loss allowance as at 31 December 2022 FVOCI Securities Stage 1 Stage 2 Stage 3 Total 3,288 898 1,761 (65) 5,882 (48) 13,564 2,972 (624) 21,746 1,281 (478) - - 803 - (18) 7 - - - - - 48 13,756 4,569 420 1,761 (65) 6,685 - 27,302 - 2,979 (492) 300 - 13,804 (1,116) 35,850 Loss allowance as at 1 January 2021 Net remeasurement of loss allowance New financial assets originated or purchased Financial assets derecognised (other than write-offs) Loss allowance as at 31 December 2021 Transfer to Stage 2 Transfer to Stage 3 Net remeasurement of loss allowance New financial assets originated or purchased Financial assets derecognised (other than write-offs) Loss allowance as at 31 December 2022 Stage 1 Stage 3 Total 1,714 (483) 348 (405) 1,174 - (49) 1,741 2,144 (248) 4,762 - - - - - - 49 24,350 - - 24,399 1,714 (483) 348 (405) 1,174 - - 26,091 2,144 (248) 29,161 INTEGRATED ANNUAL REPORT 2022 284 OTP BANK IFRS REPORT (SEPARATE) NOTE 36: FINANCIAL RISK MANAGEMENT (in HUF mn) [continued] 36.1. Credit risk [continued] 36.1.2. Loan portfolio by internal ratings 2022 Internal rating grade High grade (1-4) Medium grade (5-7) Low grade (8-9) Non performing Total Internal rating grade High grade (1-4) Medium grade (5-7) Low grade (8-9) Non performing Total 2021 Internal rating grade High grade (1-4) Medium grade (5-7) Low grade (8-9) Non performing Total Internal rating grade High grade (1-4) Medium grade (5-7) Low grade (8-9) Non performing Total Stage1 1,891,381 2,229,142 55,863 - 4,176,386 Stage1 6,965 28,937 2,462 - 38,364 Stage1 1,930,488 1,459,861 111,294 - 3,501,643 Stage1 11,870 15,929 1,562 - 29,361 Gross carrying amount Stage3 POCI Stage2 180,426 384,237 99,521 - 664,184 - - - 146,353 146,353 214 10,664 308 1,811 12,997 Accumulated loss allowance POCI Stage3 Stage2 17,509 25,419 14,123 - 57,051 - - 77,773 77,773 3 1,115 18 556 1,692 Gross carrying amount Stage3 POCI Stage2 215,519 238,767 109,696 - 563,982 - - - 108,979 108,979 224 10,522 253 2,419 13,418 Accumulated loss allowance POCI Stage3 Stage2 21,906 24,853 20,513 - 67,272 - - - 57,087 57,087 4 1,234 12 587 1,837 Total 2,072,021 2,624,043 155,692 148,164 4,999,920 Total 24,477 55,471 16,603 78,329 174,880 Total 2,146,231 1,709,150 221,243 111,398 4,188,022 Total 33,780 42,016 22,087 57,674 155,557 INTEGRATED ANNUAL REPORT 2022 285 OTP BANK IFRS REPORT (SEPARATE) NOTE 36: FINANCIAL RISK MANAGEMENT (in HUF mn) [continued] 36.1. Credit risk [continued] 36.1.3. Loan portfolio by countries An analysis of carrying amount of the non-qualified and qualified gross loan portfolio by country is as follows: Country Hungary Malta Bulgaria France Serbia Romania Croatia Slovakia Slovenia Ukraine Switzerland Other Loans, placements with other banks and repo receivables at amortised cost total Hungary Other Loans at fair value total Loans, placements with other banks and repo receivables total 31 December 2022 31 December 2021 Gross loan and placements with other banks portfolio Loss allowance Gross loan and placements with other banks portfolio Loss allowance 5,651,445 772,898 272,449 255,918 251,812 197,255 149,993 120,897 101,842 86,329 59,873 246,516 (147,446) (3,857) (10,736) (969) (6,204) (3,741) (1,424) (532) (261) (2,393) (3,104) (15,162) 5,039,601 792,943 105,899 112,810 148,599 113,517 52,395 76,373 1,514 3,577 54,332 294,874 (130,588) (2,556) (11,786) (321) (2,048) (3,695) (530) (263) (6) (2,847) (1,589) (6,890) 8,167,227 793,228 14 793,242 (195,829) - - - 6,796,434 662,008 4 662,012 (163,119) - - - 8,960,469 (195,829) 7,458,446 (163,119) 36.1.4. Loan portfolio classification by economic activities Loans at amortised cost by economic 31 December 2022 31 December 2021 activities Retail Agriculture, forestry and fishing Manufacturing, mining and quarrying and other industry Construction Wholesale and retail trade, transportation and storage accommodation and food service activities Information and communication Financial and insurance activities Real estate activities Professional, scientific, technical, Gross amount 645,496 211,875 587,190 231,015 833,618 25,404 1,183,848 471,772 Loss allowance 71,024 6,025 18,211 5,580 18,674 1,027 14,903 10,995 Gross amount 708,355 177,202 320,990 172,441 657,273 23,072 1,042,939 305,100 Loss allowance 63,843 4,976 7,249 4,919 18,490 1,136 9,444 13,143 administration 231,335 3,864 136,876 3,109 Public administration, defence, education, human health and social work activities Other services Total 99,593 478,774 4,999,920 1,592 22,985 174,880 72,027 571,747 4,188,022 472 28,776 155,557 INTEGRATED ANNUAL REPORT 2022 286 OTP BANK IFRS REPORT (SEPARATE) NOTE 36: FINANCIAL RISK MANAGEMENT (in HUF mn) [continued] 36.1. Credit risk [continued] 36.1.5. Collaterals The collateral value held by the Bank by collateral types is as follows (total collateral value). The collaterals cover loans as well as off-balance sheet exposures. Types of collateral Mortgages Guarantees and warranties Deposit from this: Cash Securities Other Total 2022 1,859,713 2,082,418 174,247 95,836 78,411 254 4,116,632 2021 1,602,913 1,554,921 229,041 80,598 148,443 387 3,387,262 The collateral value held by the Bank by collateral types is as follows (to the extent of the exposures). The collaterals cover loans as well as off-balance sheet exposures. Types of collateral Mortgage Guarantees and warranties Deposit from this: Cash Securities Other Total 2022 921,064 1,597,363 44,644 14,661 29,983 216 2,563,287 2021 753,222 1,196,385 106,620 12,756 93,864 305 2,056,532 The coverage level of loan portfolio to the extent of the exposures increased from 30.41% to 32.37% as at 31 December 2022, while the coverage to the total collateral value decreased from 50.09% to 51.99%. The collateral value (total collateral value) held by the Bank related to impaired loan portfolio (Stage 3 and POCI loans) is as follows: For the year ended 31 December 2022 Gross carrying amount Loss allowance Carrying amount Collateral value Retail consumer loans Mortgage loans Corporate loans Total 52,915 9,318 97,117 159,350 (37,324) (1,302) (40,839) (79,465) 15,591 8,016 56,278 79,885 30 40,796 93,399 134,225 For the year ended 31 December 2021 Gross carrying amount Loss allowance Carrying amount Collateral value Retail consumer loans Mortgage loans Corporate loans Total 33,690 11,101 77,606 122,397 (24,058) (1,770) (33,096) (58,924) 9,632 9,331 44,510 63,473 387 39,263 56,960 96,610 INTEGRATED ANNUAL REPORT 2022 287 OTP BANK IFRS REPORT (SEPARATE) NOTE 36: FINANCIAL RISK MANAGEMENT (in HUF mn) [continued] 36.1. Credit risk [continued] 36.1.6. Restructured loans Consumer loans Mortgage loans Corporate loans SME loans Total Restructured portfolio definition 31 December 2022 31 December 2021 Gross portfolio Loss allowance Gross portfolio 22,947 6,342 181,496 40,422 251,208 (6,279) (114) (21,820) (2,951) (31,165) 118,094 36,413 193,571 33,388 381,466 Loss allowance (21,816) (266) (25,865) (4,487) (52,434) The forborne definition used by the Bank is based on EU 2015/227 regulation. Restructuring (forbearance) is a modification of the contract – initiated by either the client or the bank – that provides a concession or allowance towards the client in respect to the client’s current or future financial difficulties. The table of restructured loans contains exposures classified as performing forborne. An exposure is considered performing forborne if the conditions of the non-performing status are not met at the time of the restructuring, or the exposure fulfilled the requirements of the minimum one-year cure period as non-performing forborne. The loan volume of Hungarian entities classified as performing forborne exclusively due to moratoria participation decreased significantly due the expiration of the probation period for retail exposures. INTEGRATED ANNUAL REPORT 2022 288 OTP BANK IFRS REPORT (SEPARATE) NOTE 36: FINANCIAL RISK MANAGEMENT (in HUF mn) [continued] 36.1. Credit risk [continued] Financial instruments by rating categories1 Held-for-trading securities as at 31 December 2022 Government bonds Other bonds Investment fund units Hungarian government discounted Treasury Bills Shares Mortgage bonds Total Held-for-trading securities as at 31 December 2021 Government bonds Other bonds Other non-interest bearing securities Hungarian government discounted Treasury Bills Shares Mortgage bonds Total A1 A2 A3 Aa2 Aa3 Aaa Ba1 - 1 - - - - 1 - 346 - - - - - - - 20 - - 20 346 - 197 - - - - - - 42 47 - 42 244 - - - - 29 - 29 Ba2 - 3,669 - - - - - - 2 39 - - 39 3,671 - Ba3 Baa1 - - - - 4 - 4 - - - - 15 - 15 Baa2 Baa3 N/A Total 62,947 1,627 - 4,785 24 11 69,394 362 117 - - - - 479 - 3 274 - 163 71 511 67,521 1,748 274 4,785 385 82 74,795 A1 A2 A3 B1 Aa3 Ba2 Baa1 Baa2 Baa3 N/A Total - 16 - - - - - 485 - - - - 35 49 59 - - 49 75 520 - - - - - 6 - 6 - - - - 19 - 19 3,634 - - - 2 - 3,636 - - - - 12 - 12 26,024 1,348 - 869 24 16 28,281 1,153 97 - - 83 - 1,333 - 158 1,134 - 310 100 1,702 30,827 2,088 1,134 869 599 116 35,633 Securities mandatorily measured at fair value through profit or loss as at 31 December 2022 Government bonds Mortgage bonds Total N/A 29,029 1,469 30,498 Total 29,029 1,469 30,498 1 Moody’s ratings INTEGRATED ANNUAL REPORT 2022 289 OTP BANK IFRS REPORT (SEPARATE) NOTE 36: FINANCIAL RISK MANAGEMENT (in HUF mn) [continued] 36.1. Credit risk [continued] Financial instruments by rating categories1 Securities mandatorily measured at fair value through profit or loss as at 31 December 2021 Government bonds Mortgage bonds Total N/A 25,126 2,935 28,061 Total 25,126 2,935 28,061 FVOCI securities as at 31 December 2022 Government bonds Mortgage bonds Other bonds Hungarian Treasury Bills Non-treading equity instruments Total FVOCI securities as at 31 December 2021 Government bonds Mortgage bonds Other bonds Hungarian Treasury Bills Non-treading equity instruments Total 1 Moody’s ratings A1 A3 Ba1 Ba2 Baa1 734 42,407 Baa2 - 5,971 3,941 136,671 - - 301,987 - - - - 1,691 3,820 - - 182,726 - - - - - - - - 43,141 1,691 3,820 5,971 3,941 621,384 - - - - Baa3 N/A WR 2,661 - 39,309 - - 41,970 - 12,146 17,774 - 17,922 47,842 27,415 - - - - 27,415 Total 177,393 356,540 62,594 182,726 17,922 797,175 A1 740 47,568 - - - 48,308 A2 2,471 - - - - 2,471 A3 Ba1 Ba2 Baa1 Baa2 Baa3 N/A Total - - 2,896 - - 2,896 15,209 - 4,001 - - 19,210 6,784 - - - - 6,784 5,032 - - - - 5,032 182,439 156,027 1,622 63,115 - 403,203 66,201 - 37,606 - - 103,807 - 14,346 18,745 - 17,137 50,228 278,876 217,941 64,870 63,115 17,137 641,939 INTEGRATED ANNUAL REPORT 2022 290 OTP BANK IFRS REPORT (SEPARATE) NOTE 36: FINANCIAL RISK MANAGEMENT (in HUF mn) [continued] 36.1. Credit risk [continued] Financial instruments by rating categories1 Securities at amortised cost as at 31 December 2022 A3 A1 - 1,301 26,341 9,357 403 1,911 - - 12,966 16,178 35,698 403 Government bonds Corporate bonds Mortgage bonds Total A2 Aaa 281,824 - - 281,824 Securities at amortised cost as at 31 December 2021 Aaa 185,261 - - 185,261 Government bonds Corporate bonds Mortgage bonds Total A1 9,002 - 12,992 21,994 - 8,210 - 8,210 A2 Ba1 Ba2 160,048 1,968 - 162,016 - - - - Baa1 44,691 11,874 - 56,565 Baa2 2,374,565 3,971 - 2,378,536 Baa3 33,248 29,022 - 62,270 N/A - 252,938 11,518 264,456 WR 24,427 - - 24,427 Total 2,946,445 311,444 24,484 3,282,373 Ba1 18,871 - - 18,871 Ba2 12,663 - - 12,663 Baa1 25,986 7,343 - 33,329 Baa2 2,550,824 3,682 - 2,554,506 Baa3 55,256 14,780 - 70,036 N/A - 154,886 11,282 166,168 Total 2,857,863 188,901 24,274 3,071,038 1 Moody’s ratings INTEGRATED ANNUAL REPORT 2022 291 OTP BANK IFRS REPORT (SEPARATE) NOTE 36: FINANCIAL RISK MANAGEMENT (in HUF mn) [continued] 36.1. Credit risk [continued] An analysis of securities (held for trading, mandatorily FVTPL, FVOCI and amortised cost) in a country breakdown is as follows: Country 31 December 2022 Gross carrying amount Loss allowance 31 December 2021 Gross carrying amount Loss allowance Hungary United States of America Luxembourg Serbia Spain Russia Portugal Other Securities at amortised cost total Hungary Luxembourg Russia Other FVOCI securities total United States of America Austria Other Non-trading equity instruments designated to measure at through other comprehensive income Hungary Serbia Other Held for trading securities total Hungary Luxembourg United States of America Portugal Securities mandatorily measured at fair value through profit or loss Securities total fair value 2,412,543 418,900 223,256 140,116 56,375 27,064 16,979 22,990 3,318,223 664,813 62,549 26,829 25,062 779,253 5,479 11,914 529 17,922 67,448 3,668 3,679 74,795 21,124 6,885 1,469 1,020 (19,158) (1,234) (4,804) (867) (365) (9,246) (101) (75) (35,850) - - - - - - - - - - - - - - - - - 2,709,786 194,518 - 12,724 33,659 32,901 36,268 57,867 3,077,723 517,461 - 65,275 42,065 624,801 3,389 13,223 526 17,138 29,814 3,634 2,185 35,633 18,807 5,542 2,935 777 (5,823) (149) - (61) (178) (46) (177) (251) (6,685) - - - - - - - - - - - - - - - - - 30,498 4,220,691 - (35,850) 28,061 3,783,356 - (6,685) INTEGRATED ANNUAL REPORT 2022 292 OTP BANK IFRS REPORT (SEPARATE) NOTE 36: FINANCIAL RISK MANAGEMENT (in HUF mn) [continued] 36.2. Maturity analysis of assets and liabilities and liquidity risk Liquidity risk is a measure of the extent to which the Bank may be required to raise funds to meet its commitments associated with financial instruments. The Bank maintains its liquidity profiles in accordance with regulations laid down by the NBH. The essential aspect of the liquidity risk management strategy is to identify all relevant systemic and idiosyncratic sources of liquidity risk and to measure the probability and severity of such events. During liquidity risk management the Bank considers the effect of liquidity risk events caused by reasons arising in the bank business line (deposit withdrawal), the national economy (exchange rate shock, yield curve shock) and the global financial system (capital market shock). In line with the Bank’s risk management policy liquidity risks are measured and managed on multiply hierarchy levels and applying integrated unified VaR based methodology. The basic requirement is that the Bank must keep high quality liquidity reserves by means it can fulfil all liabilities when they fall due without material additional costs. The liquidity reserves can be divided into two parts. There are separate decentralized liquid asset portfolios at subsidiary level and a centralized flexible liquidity pool at Group level. The reserves at subsidiary levels are held to cover the relevant shocks of the subsidiaries which may arise in local currencies (deposit withdrawal, local capital market shock, unexpected business expansion), while the centralized liquidity pool is held to cover the OTP Bank’s separate shocks (deposit-, yield curve- and exchange rate shocks) and all group member’s potential shocks that may arise in foreign currencies (deposit withdrawal, capital market shock). The recalculation of shocks is made at least quarterly while the recalibration of shock measurement models and review of the risk management methodology is an annual process. The monitoring of liquidity reserves for both centralized and decentralized liquid asset portfolio has been built into the daily reporting process. Due to the balance sheet adjustment process (deleveraging) experienced in the last few years, the liquidity reserves of the Bank increased significantly while the liquidity risk exposure has decreased considerably. Currently the (over)coverage of risk liquidity risk exposure by high quality liquid assets is at all-time record highs. There were no material changes in the liquidity risk management process for the year ended 31 December 2022. The following tables provide an analysis of assets and liabilities about the non-discounted cash flow into relevant maturity groupings based on the remaining period from the balance sheet date to the contractual maturity date. It is presented under the most prudent consideration of maturity dates where options or repayment schedules allow for early repayment possibilities. The contractual amounts disclosed in the maturity analyses are the contractual undiscounted cash flows like gross finance lease obligations (before deducting finance charges); prices specified in forward agreements to purchase financial assets for cash; net amounts for pay-floating/receive-fixed interest rate swaps for which net cash flows are exchanged; contractual amounts to be exchanged in a derivative financial instrument for which gross cash flows are exchanged; gross loan commitments. Such undiscounted cash flows differ from the amount included in the statement of financial position because the amount in that statement is based on discounted cash flows. When the amount payable is not fixed, the amount disclosed is determined by reference to the conditions existing at the end of the reporting period. For example, when the amount payable varies with changes in an index, the amount disclosed may be based on the level of the index at the end of the period. INTEGRATED ANNUAL REPORT 2022 293 OTP BANK IFRS REPORT (SEPARATE) NOTE 36: FINANCIAL RISK MANAGEMENT (in HUF mn) [continued] 36.2. Maturity analysis of assets and liabilities and liquidity risk [continued] Within 3 months Within one year and over 3 months Within 5 years and over one year Over 5 years Without maturity Total 1,093,551 993,586 248,696 4,380 118,490 32,817 1,413,038 - 198,808 - 11,013 157,390 318,757 1,040,150 - 1,090,007 - - 636,267 - - - - 1,093,551 2,918,668 248,696 58,638 9,357 20,787 104,175 398,959 1,874,608 1,436,743 223,210 1,139,867 975,208 122,241 - - 1,020,290 3,366,049 4,865,139 18,927 20,768 140,776 667,279 - 847,750 - 260,924 4,184,409 839,590 10,903,401 134,894 8,762 3,395 583 1,049 258,771 12,150,445 (7,966,036) - 1,228 1,748,114 - - 4,999,731 - - 3,651,188 1,596,717 - 1,596,717 262,152 1,743,952 16,327,394 164,140 192,419 3,343 1,912 - 1,133 4,895 17,377 385,219 1,362,895 654,843 12,091 270,129 486,782 - 5,535 25,857 1,706 1,456,943 3,542,788 111,406 11,272 - 3,326 291,801 12,602 9,663 - 440,070 3,211,118 - 1,769,979 - 11,119,183 408,366 - 500,782 - 295,196 - 19,853 - 41,464 - - 277,854 - 14,432,677 1,894,717 1,743,952 8,478,109 1,788,941 511,637 179,092 - 10,957,779 (8,693,889) (1,814,992) (524,167) (176,944) (11,209,992) - (215,780) (26,051) (12,530) 2,148 - (252,213) 316,440 186,838 784,159 15,859 - 1,303,296 (297,714) (217,102) (2,031,727) (13,425) - (2,559,968) 31 December 2022 Cash, amounts due from banks and balances with the National Bank of Hungary Placements with other banks Repo receivables Financial assets at fair value through profit or loss Securities at fair value through other comprehensive income Securities at amortised cost Loans at amortised cost Loans mandatorily measured at fair value through profit or loss Investments in subsidiaries, associates and other investments Other financial assets TOTAL ASSETS Amounts due to banks and deposits from the National Bank of Hungary and other banks Deposits from customers Repo liabilities Liabilities from issued securities Subordinated bonds and loans Financial liabilities at fair value through profit or loss Leasing liabilities Other financial liabilities TOTAL LIABILITIES NET POSITION Receivables from derivative financial instruments classified as held for trading Liabilities from derivative financial instruments classified as held for trading Net position of derivative financial instruments classified as held for trading Receivables from derivative financial instruments designated as hedge accounting Liabilities from derivative financial instruments designated as hedge accounting Net position of derivative financial instruments designated as hedging accounting Net position of derivative 18,726 (30,264) (1,247,568) financial instruments total (197,054) (56,315) (1,260,098) Commitments to extend credit Confirmed letters of credit Factoring loan commitment Bank guarantees Off-balance sheet commitments 1,852,164 12,376 373,417 84,327 2,322,284 - - - 216,572 216,572 - - - 405,546 405,546 2,434 4,582 - - - 1,167,378 1,167,378 - (1,256,672) - - - - - - (1,508,885) 1,852,164 12,376 373,417 1,873,823 4,111,780 Analysis for net position of assets and liabilities are calculated in accordance with IFRS 7, therefore certain financial instruments are presented in the earliest period in which the Bank could be required to pay. On-demand deposits are presented in the earliest (within 3 month) period category, however based on Management’s discretion the Bank has appropriate liquidity reserves as maintenance and management of liquidity risk. INTEGRATED ANNUAL REPORT 2022 294 OTP BANK IFRS REPORT (SEPARATE) NOTE 36: FINANCIAL RISK MANAGEMENT (in HUF mn) [continued] 36.2. Maturity analysis of assets and liabilities and liquidity risk [continued] As at 31 December 2021 Cash, amounts due from banks and balances with the National Bank of Hungary Placements with other banks Repo receivables Financial assets at fair value through profit or loss Securities at fair value through other comprehensive income Securities at amortised cost Loans at amortised cost Loans mandatorily measured at fair value through profit or loss Investments in subsidiaries, associates and other investments Other financial assets TOTAL ASSETS Amounts due to banks and deposits from the National Bank of Hungary and other banks Deposits from customers Repo liabilities Liabilities from issued securities Subordinated bonds and loans Financial liabilities at fair value through profit or loss Leasing liabilities Other financial liabilities TOTAL LIABILITIES NET POSITION Receivables from derivative financial instruments classified as held for trading Liabilities from derivative financial instruments classified as held for trading Net position of derivative financial instruments classified as held for trading Receivables from derivative financial instruments designated as hedge accounting Liabilities from derivative financial instruments designated as hedge accounting Net position of derivative financial instruments designated as hedging accounting Net position of derivative financial instruments total Within 3 months Within one year Within 5 years and over one year and over 3 months Over 5 years Without maturity Total 475,130 1,176,184 33,710 - 585,499 - - 609,182 - - 204,493 - - - - 475,130 2,575,358 33,710 908 3,709 19,804 10,259 29,794 64,474 16,329 28,514 1,327,629 58,446 308,921 873,169 358,805 1,792,058 1,377,885 199,854 938,902 726,016 16,516 15,575 121,104 553,569 17,138 - - - 650,572 3,068,395 4,304,699 706,764 - 157,669 3,232,589 - 1,227 1,846,546 - - 4,278,838 - - 2,633,093 1,573,008 - 1,573,008 158,896 1,619,940 13,611,006 297,779 9,844,911 49,726 5,258 2,841 531 1,078 193,315 10,395,439 (7,162,850) 138,418 57,851 - 6,812 - 1,253 3,791 5,337 213,462 1,633,084 506,233 33,112 36,854 8,812 - 4,422 9,356 876 599,665 3,679,173 108,773 12,658 - 2,065 269,698 13,927 3,707 - 410,828 2,222,265 - - - - - 1,051,203 9,948,532 86,580 22,947 272,539 - - - - 1,619,940 20,133 17,932 199,528 11,619,394 1,991,612 4,573,312 1,957,498 339,869 135,728 (4,581,312) (1,951,622) (328,607) (132,345) (8,000) 5,876 11,262 3,383 5,693 37,436 580,280 16,195 (7,658) (46,925) (595,692) (16,417) (1,965) (9,489) (15,412) (222) (9,965) (3,613) (4,150) 3,161 - - - - - - - - - - - - 7,006,407 (6,993,886) 12,521 639,604 (666,692) (27,088) (14,567) 1,677,030 30,381 423,673 1,507,917 3,639,001 Commitments to extend credit Confirmed letters of credit Factoring loan commitment Bank guarantees Off-balance sheet commitments 1,677,030 30,381 423,673 133,460 2,264,544 - - - 189,747 189,747 - - - 247,886 247,886 - - - 936,824 936,824 Analysis for net position of assets and liabilities are calculated in accordance with IFRS 7, therefore certain financial instruments are presented in the earliest period in which the Bank could be required to pay. On-demand deposits are presented in the earliest (within 3 month) period category, however based on Management’s discretion the Bank has appropriate liquidity reserves as maintenance and management of liquidity risk. INTEGRATED ANNUAL REPORT 2022 295 OTP BANK IFRS REPORT (SEPARATE) NOTE 36: FINANCIAL RISK MANAGEMENT (in HUF mn) [continued] 36.3. Net foreign currency position and foreign currency risk As at 31 December 2022 Assets Liabilities Derivative instruments Net position financial As at 31 December 2021 Assets Liabilities Derivative instruments Net position financial USD 583,984 (741,173) 154,902 (2,287) USD 486,225 (296,903) (197,080) (7,758) EUR 3,681,519 (3,992,404) CHF 8,956 (65,565) Others 369,969 (82,488) 615,822 304,937 56,690 81 (285,615) 1,866 EUR 2,448,729 (2,121,543) CHF 14,989 (42,590) Others 290,504 (59,350) (321,377) 5,809 27,953 352 (229,089) 2,065 Total 4,644,428 (4,881,630) 541,799 304,597 Total 3,240,447 (2,520,386) (719,593) 468 The table above provides an analysis of the Bank’s main foreign currency exposures. The remaining foreign currencies are shown within ‘Others’. The Bank monitors its foreign exchange position for compliance with the regulatory requirements of the NBH and its own limit system established in respect of limits on open positions. The measurement of the Bank’s open its currency position involves monitoring the VaR limit on the foreign exchange exposure of the Bank. In the table Derivative financial instruments are stated at fair value. 36.4. Interest rate risk management Interest rate risk is the risk that the value of a financial instrument will fluctuate due to changes in market interest rates. The length of time for which the rate of interest is fixed on a financial instrument, therefore, indicates to what extent it is exposed to interest rate risk. The majority of the Bank's interest bearing assets and liabilities are structured to match either short-term assets and short-term liabilities, or long-term assets and liabilities with repricing opportunities within one year, or long- term assets and corresponding liabilities where repricing is performed simultaneously. In addition, the significant spread existing between the different types of interest bearing assets and liabilities enables the Bank to benefit from a high level of flexibility in adjusting for its interest rate matching and interest rate risk exposure. The following table presents the interest repricing dates of the Bank. Variable yield assets and liabilities have been reported in accordance with their next repricing date. Fixed income assets and liabilities have been reported in accordance with their maturity. INTEGRATED ANNUAL REPORT 2022 296 OTP BANK IFRS REPORT (SEPARATE) NOTE 36: FINANCIAL RISK MANAGEMENT (in HUF mn) [continued] 36.4. Interest rate risk management [continued] As at 31 December 2022 ASSETS Cash, amounts due from banks and balances with the National Bank of Hungary fixed interest variable interest non-interest-bearing Placements with other banks fixed interest variable interest non-interest-bearing Repo receivables fixed interest variable interest non-interest-bearing Securities held for trading fixed interest variable interest non-interest-bearing Securities mandatorily measured fair value through profit or loss at fixed interest variable interest non-interest-bearing Securities at fair value other through comprehensive income fixed interest variable interest non-interest-bearing within 1 month within 3 months over 1 month within 1 year over 3 months within 2 years over 1 year over 2 years Non-interest -bearing Total HUF foreign currency HUF foreign currency HUF foreign currency HUF foreign currency HUF foreign currency HUF foreign currency HUF foreign currency Total 637,040 637,040 - - 665,056 5,118 659,938 - 246,529 155,711 90,818 - 16 1 15 - - - - - 281,342 45,688 235,654 - 251,192 251,192 - - 153,142 50,475 102,667 - - - - - 1,203 1,203 - - - - - - - - - - - - - - 130,299 19,408 110,891 - - - - - 5,199 1,009 4,190 - - - - - 62,611 62,610 1 - - - - - 461,042 105,266 355,776 - - - - - 229 229 - - - - - - - - - - - - - - 74,287 57,053 17,234 - - - - - 12,146 3,775 8,371 - - - - - - - - - 208,087 86,207 121,880 - - - - - 4,250 4,250 - - - - - - 98,606 98,606 - - - - - - 21,882 21,882 - - - - - - - - - - - 1,012,903 - 1,012,903 - - - - - - - - - - - - 26,857 1,049 26,857 1,049 - - - - - - - - 183,139 - - 183,139 20,827 - - 20,827 820,179 637,040 - 183,139 272,019 251,192 - 20,827 1,092,198 888,232 - 203,966 36,780 36,780 - - - - - - 1,305 1,305 - - 48,754 - - 48,754 - - - - 123 - - 123 10,873 2,029,905 - 1,193,088 788,063 - 48,754 10,873 246,529 - 155,711 - 90,818 - - - 66,223 536 53,524 - 12,576 - 123 536 869,924 2,899,829 278,728 1,471,816 580,323 1,368,386 10,873 59,627 246,529 - 155,711 - 90,818 - - - 74,795 8,572 61,560 8,036 12,576 - 659 536 - - - - - - - - - - - - - - - - - - - - 21,124 - - 21,124 9,374 - - 9,374 21,124 - - 21,124 9,374 - - 9,374 30,498 - - 30,498 112,239 112,232 7 - 41,000 41,000 - - 13,691 13,691 - - 3,850 3,850 - - 194,931 194,931 - - 69,589 69,589 - - 528 - - 528 17,394 - - 17,394 665,342 429,152 235,662 528 131,833 114,439 - 17,394 797,175 543,591 235,662 17,922 INTEGRATED ANNUAL REPORT 2022 297 OTP BANK IFRS REPORT (SEPARATE) NOTE 36: FINANCIAL RISK MANAGEMENT (in HUF mn) [continued] 36.4. Interest rate risk management [continued] As at 31 December 2022 ASSETS [continued] Loans measured amortised cost at fixed interest variable interest non-interest-bearing Loans mandatorily measured at fair value through profit or loss fixed interest variable interest non-interest-bearing Securities at amortised cost fixed interest variable interest non-interest-bearing Other financial assets fixed interest variable interest non-interest-bearing Derivative financial instruments fixed interest variable interest non-interest-bearing within 1 month within 3 months over 1 month within 1 year over 3 months within 2 years over 1 year over 2 years Non-interest -bearing Total HUF foreign currency HUF foreign currency HUF foreign currency HUF foreign currency HUF foreign currency HUF foreign currency HUF foreign currency Total 766,348 12,400 753,948 - 661,415 2,313 659,102 - 298,189 10,673 287,516 - 1,468,489 2,338 1,466,151 - 126,438 114,941 11,497 - 89,257 8,718 80,539 - 142,052 141,272 780 - 7,052 7,052 - - 958,858 951,725 7,133 - 129,401 129,401 - - 133,290 - - 133,290 44,249 44,249 2,425,175 - 1,231,011 - 1,060,874 133,290 2,399,863 4,825,038 149,822 1,380,833 2,205,792 3,266,666 177,539 44,249 18,432 - 18,432 - 19,142 - 19,142 19,142 - - - - - - - - - - - - - - - - 110 - 110 - - - - - - - - - - - - - 5,072 - 5,072 5,072 - - - - 2,112,146 1,991,112 121,034 - 2,789,859 2,722,206 67,653 - 906,446 428,080 478,366 - 1,424,063 878,305 545,758 - 515 - 515 - 179,968 179,968 - 179,968 - - - - 469,337 262,461 206,876 - - - - - 139,632 139,632 - 139,632 - - - - 545,207 518,338 26,869 - 181,763 - 181,763 - 271,024 271,024 - 271,024 - - - - 36,682 36,682 - - - - - - 592,422 - 592,422 - - 2,422 1,914,570 2,422 1,914,570 - 2,422 1,914,570 - - - - - - - - 35,935 35,935 - - 183,664 183,664 - - - - - - 750,543 750,543 - 750,543 - - - - 98,147 98,147 - - - - - - - - - - 200,781 - - 200,781 194,741 - - 194,741 - - - - 793,242 - 793,242 - - - - - 793,242 - 793,242 - - 2,384,704 - 2,365,562 - 19,142 - 2,384,704 200,781 - - 200,781 54,344 - - 54,344 5,072 897,669 3,282,373 892,597 3,258,159 24,214 897,669 3,282,373 255,125 54,344 - - - - 255,125 54,344 604,648 3,903,016 - 2,901,999 806,276 - 194,741 604,648 5,497,859 9,400,875 4,252,931 7,154,930 640,280 1,446,556 799,389 604,648 INTEGRATED ANNUAL REPORT 2022 298 OTP BANK IFRS REPORT (SEPARATE) NOTE 36: FINANCIAL RISK MANAGEMENT (in HUF mn) [continued] 36.4. Interest rate risk management [continued] As at 31 December 2022 LIABILITIES within 1 month within 3 months over 1 month within 1 year over 3 months within 2 years over 1 year over 2 years Non-interest -bearing Total HUF foreign currency HUF foreign currency HUF foreign currency HUF foreign currency HUF foreign currency HUF foreign currency HUF foreign currency Total Amounts due to banks and deposits with the National Bank of Hungary and other banks fixed interest variable interest non-interest-bearing Financial liabilities to designated measure fair value through profit or loss at fixed interest variable interest Repo liabilities fixed interest variable interest Deposits from customers fixed interest variable interest non-interest-bearing Liabilities from issued securities fixed interest variable interest Subordinated bonds and loans variable interest Leasing liabilities fixed interest variable interest Other financial liabilities non-interest-bearing Derivative financial instruments fixed interest variable interest non-interest-bearing NET POSITION 229,856 200,719 29,137 - 385,369 106,264 279,105 - 37,293 37,293 - - 40,697 40,697 - - 129,475 129,475 - - 8,214 8,214 - - 71,538 71,538 - - 315,766 315,766 - - 397,820 397,820 - - 32,570 32,570 - - 81,759 - - 81,759 5,771 - - 5,771 947,741 836,845 29,137 81,759 788,387 503,511 279,105 5,771 1,736,128 1,340,356 308,242 87,530 16,576 26 16,550 119,520 29,144 90,376 - - - 188,121 4 188,117 7,563,627 2,887,850 552,561 1,008,247 6,555,380 2,335,289 - - 1,878 211 1,667 - - 282 229 53 - - - - - - - 431 41 390 - - - - - 85,356 85,356 - 302,491 302,491 - - 1,215 - 1,215 - - 430 326 104 - - - - - 15,369 15,369 - 190,393 190,393 - - - - - 93,110 93,110 815 83 732 - - - - - - - - 127,940 127,940 - - 1,702 1,702 - - - 1,990 1,567 423 - - 3,097,710 1,854,159 3,012,679 1,709,457 144,702 85,031 - - (6,283,398) (1,459,119) 478,930 331,253 147,677 - 1,819,835 972,597 847,238 - 497,139 1,198,676 574,661 216,895 357,766 - 139,162 - - - - - - 23,147 23,147 - - - - - 201,076 201,076 2,781 379 2,402 - - 554,788 532,485 22,303 - 237,427 - - - - - - - - - - 1,854 1,854 - - - 5,436 4,688 748 - - - - - - - - - - - - - - - - - 4,966 1,004 3,962 - - - - - - - - 16 16 - - 43,854 43,854 - - - 15,365 14,798 567 - - 22,780 22,758 22 - 664,092 36,706 36,706 - - (307,130) 118,071 118,071 - - 4,309,079 - - - - - - - - - - 448,206 448,206 - - - 8,968 267 8,701 - - 114,115 114,115 - - 481,906 - - - - - - 12,147 - - 12,147 - - - - - - - - 220,129 220,129 245,955 - - 245,955 222,490 - - - - - - 11,547 - - 11,547 - - - - - - - - 38,344 38,344 16,576 26 16,550 204,876 114,500 90,376 8,006,221 1,438,694 6,555,380 12,147 50,503 47,621 2,882 - - 23,503 21,608 1,895 220,129 220,129 - - - 203,490 15,373 188,117 16,576 26 16,550 408,366 129,873 278,493 3,112,937 11,119,158 2,204,795 8,890,669 23,694 766,101 2,335,289 11,547 448,206 448,206 - 294,186 294,186 17,961 1,774 16,187 38,344 38,344 498,709 495,827 2,882 294,186 294,186 41,464 23,382 18,082 258,473 258,473 555,251 - - 555,251 151,332 4,538,107 3,701,656 590,496 245,955 (451,436) 4,934,854 3,365,360 1,014,243 555,251 303,092 9,472,961 7,067,016 1,604,739 801,206 (148,343) INTEGRATED ANNUAL REPORT 2022 299 OTP BANK IFRS REPORT (SEPARATE) NOTE 36: FINANCIAL RISK MANAGEMENT (in HUF mn) [continued] 36.4. Interest rate risk management [continued] As at 31 December 2021 within 1 month within 3 months over 1 month within 1 year over 3 months within 2 years over 1 year over 2 years Non-interest -bearing Total ASSETS HUF foreign currency HUF foreign currency HUF foreign currency HUF foreign currency HUF foreign currency HUF foreign currency HUF foreign currency Total Cash, amounts due from banks and balances with the National Bank of Hungary fixed interest variable interest non-interest-bearing Placements with other banks fixed interest variable interest non-interest-bearing Repo receivables fixed interest variable interest non-interest-bearing Securities held for trading fixed interest variable interest non-interest-bearing Securities mandatorily measured fair value through profit or loss at fixed interest variable interest non-interest-bearing Securities at fair value other through comprehensive income fixed interest variable interest non-interest-bearing 31,228 31,228 - - 1,353,059 774,315 578,744 - 33,638 33,638 - - 1,237 32 1,205 - - - - - 50,774 2,437 48,337 - 289,008 289,008 - - 127,852 34,420 93,432 - - - - - - - - - - - - - - - - - - - - - 148,091 449 147,642 - - - - - 664 487 177 - - - - - 22,420 6,897 15,523 - - - - - 165,940 156,755 9,185 - - - - - - - - - - - - - - - - - - - - - 31,821 2,446 29,375 - - - - - 2,481 2,208 273 - - - - - - - - - 79,243 79,243 - - - - - - 1,242 1,242 - - - - - - 76,105 76,105 - - - - - - 360 360 - - - - - - 29,677 29,677 - - - - - - 3,508 3,508 - - - - - - 499,636 499,636 - - - - - - 22,931 22,931 - - - - - - 133,053 - - 133,053 21,655 - - 21,655 164,281 31,228 - 133,053 310,663 289,008 - 21,655 474,944 320,236 - 154,708 27,178 27,178 - - - - - - 1,478 1,478 - - 24,416 - - 24,416 - - - - 1,200 - - 1,200 4,194 2,133,128 - 1,352,951 755,761 - 24,416 4,194 33,638 - 33,638 - - - - - 28,873 532 26,018 - 1,655 - 1,200 532 2,567,212 434,084 327,273 1,680,224 858,378 102,617 28,610 4,194 33,638 - 33,638 - - - - - 35,633 6,760 32,246 6,228 1,655 - 1,732 532 - - - - - - - - - - - - - - - - - - - - 18,807 - - 18,807 9,254 - - 9,254 18,807 - - 18,807 9,254 - - 9,254 28,061 - - 28,061 65,666 57,092 8,574 - 432 432 - - 40,185 40,185 - - 39,228 39,228 - - 289,634 289,634 - - 116,463 116,463 - - 528 - - 528 16,609 - - 16,609 469,207 396,245 72,434 528 172,732 156,123 - 16,609 641,939 552,368 72,434 17,137 INTEGRATED ANNUAL REPORT 2022 300 OTP BANK IFRS REPORT (SEPARATE) NOTE 36: FINANCIAL RISK MANAGEMENT (in HUF mn) [continued] 36.4. Interest rate risk management [continued] As at 31 December 2021 ASSETS [continued] Loans measured amortised cost at fixed interest variable interest non-interest-bearing Loans mandatorily measured fair value through profit or loss at fixed interest variable interest non-interest-bearing Securities at amortised cost fixed interest variable interest non-interest-bearing Other financial assets fixed interest variable interest non-interest-bearing Derivative financial instruments fixed interest variable interest non-interest-bearing within 1 month within 3 months over 1 month within 1 year over 3 months within 2 years over 1 year over 2 years Non-interest -bearing Total HUF foreign currency HUF foreign currency HUF foreign currency HUF foreign currency HUF foreign currency HUF foreign currency HUF foreign currency Total 639,477 295 639,182 - 339,611 286 339,325 - 424,299 894 423,405 - 1,161,425 9,746 1,151,679 - 53,018 13,723 39,295 - 126,963 57,602 69,361 - 185,264 183,818 1,446 - 10,912 10,912 - - 829,049 819,629 9,420 - 89,993 89,993 - - 121,277 - - 121,277 19,371 - 19,371 - - - - - - - - - - - - - 7,609 - 7,609 - - - - - 136 - 136 - - - - - - - - - - - - - 4,811 - 4,811 - - - - - 1,507,306 1,400,852 106,454 - 1,256,601 1,133,429 123,172 - 395,623 188,144 207,479 - 936,093 551,308 384,785 - 829 - 829 - 304,051 304,051 - - - - - - 675,976 570,718 105,258 - - - - - 1,069 1,069 - - - - - - 863,692 861,983 1,709 - 755 - 755 - 215,615 215,615 - - - - - - 10,760 10,760 - - - - - - 640,921 - 640,921 - 343 2,044,502 343 2,044,502 - - - - - - - - - - - - 57,437 57,378 59 - 183,617 183,617 - - - - - - 493,038 493,038 - - - - - - 54,913 54,913 - - - - - - - - - - 133,896 - - 133,896 181,095 - - 181,095 51,177 51,177 1,780,081 4,032,465 2,252,384 - 1,018,359 168,539 1,186,898 - 1,112,748 1,560,365 2,673,113 172,454 121,277 51,177 - - - - 662,012 - 662,012 - - - - - 662,012 - 662,012 - - 2,564,168 - 2,564,168 - - - - 133,896 19,852 - - - - 133,896 19,852 506,870 3,071,038 494,450 3,058,618 12,420 12,420 - - 153,748 19,852 - - - - 153,748 19,852 675,035 3,843,771 2,954,377 6,798,148 - 2,354,091 2,659,011 5,013,102 928,916 - 856,130 675,035 419,191 181,095 509,725 675,035 INTEGRATED ANNUAL REPORT 2022 301 OTP BANK IFRS REPORT (SEPARATE) NOTE 36: FINANCIAL RISK MANAGEMENT (in HUF mn) [continued] 36.4. Interest rate risk management [continued] As at 31 December 2021 LIABILITIES Amounts due to banks and deposits with the National Bank of Hungary and other banks fixed interest variable interest non-interest-bearing Financial liabilities designated to measure at fair value through profit or loss variable interest Repo liabilities fixed interest Deposits from customers fixed interest variable interest non-interest-bearing Liabilities from issued securities fixed interest variable interest Subordinated bonds and loans variable interest Leasing liabilities fixed interest variable interest Other financial liabilities non-interest-bearing Derivative financial instruments fixed interest variable interest non-interest-bearing within 1 month within 3 months over 1 month within 1 year over 3 months within 2 years over 1 year over 2 years Non-interest -bearing Total HUF foreign currency HUF foreign currency HUF foreign currency HUF foreign currency HUF foreign currency HUF foreign currency HUF foreign currency Total 151,809 106,028 45,781 - 95,432 22,624 72,808 - 12,344 12,344 - - 10,405 10,405 - - 52,872 52,872 - - 577 577 - - 224,479 224,479 - - 1,140 1,140 - - 471,620 471,620 - - 20,133 20,133 49,726 49,726 7,628,098 496,069 7,132,029 - - - 36,854 36,854 2,039,650 131,836 1,907,814 - 865 212 653 - - 192 108 84 - - - - - - - 380 25 355 - - - - - - 197,780 197,780 - - 8,514 - 8,514 - - 236 72 164 - - - - - - 18,468 18,468 - - - - - 85,551 85,551 522 34 488 - - - - - - 30,063 30,063 - - 4,696 4,147 549 - - 1,004 538 466 - - 840,797 728,548 112,249 - 2,004,808 1,814,645 190,163 - 220,053 151,791 68,262 - 1,083,211 579,843 503,368 - 709,776 525,835 183,941 - - - - - 11,066 11,066 - - - - - 186,225 186,225 2,535 123 2,412 - - 870,457 868,689 1,768 - - - - - - - - - 1,676 1,676 - - - 1,362 717 645 - - 12,937 12,360 577 - - - - - - - - - - - - - - 1,321 144 1,177 - - 54,862 54,789 73 - - - - - - - - - 6,402 6,402 - - - 4,838 2,118 2,720 - - 96,350 96,350 - - - - - - - - - - - - - - - - - - - 5,542 485 5,057 - - 73,700 73,700 - - 29,684 - - 29,684 - - - - 12,948 - - 12,948 - - - - - - - - 156,012 156,012 411,167 - - 411,167 841 - - 841 942,808 867,343 45,781 29,684 108,395 34,746 72,808 841 1,051,203 902,089 118,589 30,525 - - - - - - 36,854 36,854 20,133 20,133 49,726 49,726 20,133 20,133 86,580 86,580 10,459 7,868,889 2,079,643 9,948,532 - 885,282 - 7,132,029 1,907,814 9,039,843 23,407 723,912 161,370 12,948 10,459 10,459 - - - - - - - - 38,499 38,499 22,153 12,437 9,716 - - 7,632 3,553 4,079 156,012 156,012 - - - 271,776 271,776 10,300 811 9,489 38,499 38,499 22,153 12,437 9,716 271,776 271,776 17,932 4,364 13,568 194,511 194,511 430,486 4,517,524 2,291,080 6,808,604 - 1,514,884 3,391,666 4,906,550 695,372 1,060,401 - 841,653 430,486 430,486 365,029 411,167 NET POSITION (5,055,530) (2,156,443) 552,306 1,070,112 335,431 1,781 288,590 83,782 3,931,080 703,821 4,461 318,023 56,338 21,076 77,414 INTEGRATED ANNUAL REPORT 2022 302 OTP BANK IFRS REPORT (SEPARATE) NOTE 36: FINANCIAL RISK MANAGEMENT (in HUF mn) [continued] 36.5. Market risk The Bank takes on exposure to market risks. Market risks arise from open positions in interest rate, currency and equity products, all of which are exposed to general and specific market movements. The Bank applies a Value- at-Risk ("VaR") methodology to estimate the market risk of positions held and the maximum losses expected, based upon a number of assumptions for various changes in market conditions. The Management Board sets limits on the value of risk that may be accepted, which is monitored on a daily basis. (Analysis of liquidity risk, foreign currency risk and interest rate risk is detailed in Notes 36.2, 36.3 and 36.4 respectively.) 36.5.1. Market risk sensitivity analysis The VaR risk measure estimates the potential loss in pre-tax profit over a given holding period for a specified confidence level. The VaR methodology is a statistically defined, probability-based approach that takes into account market volatilities as well as risk diversification by recognizing offsetting positions and correlations between products and markets. Risks can be measured consistently across all markets and products, and risk measures can be aggregated to arrive at a single risk number. The one-day 99% VaR number used by the Group reflects the 99% probability that the daily loss will not exceed the reported VaR. VaR methodologies are employed to calculate daily risk numbers include the historical and variance-covariance approach. The diversification effect has not been validated among the various market risk types when capital calculation happens. In addition to these two methodologies, Monte Carlo simulations are applied to the various portfolios on a monthly basis to determine potential future exposure. The VaR of the trading portfolio can be summarized as follows (in HUF mn): Historical VaR (99%, one-day) by risk type Average Foreign exchange Interest rate Equity instruments Total VaR exposure 2022 6,820 327 42 7,189 2021 1,560 135 20 1,715 The table above shows the VaR figures by asset classes. Since processes driving the value of the major asset classes are not independent (for example the depreciation of HUF against the EUR mostly coincide with the increase of the yields of Hungarian Government Bonds), a diversification impact emerges, so the overall VaR is less than the sum of the VaR of each individual asset class. While VaR captures the OTP’s daily exposure to currency and interest rate risk, sensitivity analysis evaluates the impact of a reasonably possible change in interest or foreign currency rates over a year. The longer time frame of sensitivity analysis complements VaR and helps the OTP to assess its market risk exposures. Details of sensitivity analysis for foreign currency risk are set out in Note 36.5.2., for interest rate risk in Note 36.5.3., and for equity price sensitivity analysis in Note 36.5.4. INTEGRATED ANNUAL REPORT 2022 303 OTP BANK IFRS REPORT (SEPARATE) NOTE 36: FINANCIAL RISK MANAGEMENT (in HUF mn) [continued] 36.5. Market risk [continued] 36.5.2. Foreign currency sensitivity analysis The Bank changed its methodology of foreign currency sensitivity analysis and has been using a historical VaR calculation since 31 March 2021. The former Monte Carlo simulation represented the Group’s sensitivity to the rise and fall in the HUF exchange rate against EUR, over a 3 months period. The sensitivity analysis included only outstanding foreign currency denominated monetary items as strategic open positions related to foreign activities. In line with the Management's intention, the former EUR (310) million strategic open position was fully closed as of 31 March 2021. Since the closing of the strategic open position, the Group has been using a historical VaR calculation with 1 day holding period. The analysis includes the same net open foreign exchange position as used under the internal capital adequacy assessment process (ICAAP). The VaR methodology is a statistically defined, probability-based approach that takes into account market volatilities as well as risk diversification by recognizing offsetting positions and correlations between products and markets. Since the closing of the strategic open position, the Group has been using a historical VaR calculation with 1 day holding period. The analysis includes the same net open foreign exchange position as used under the internal capital adequacy assessment process (ICAAP). The VaR methodology is a statistically defined, probability-based approach that takes into account market volatilities as well as risk diversification by recognizing offsetting positions and correlations between products and markets. Additionally, the Bank determines the foreign currency risk of assets evaluated through the Other Comprehensive Income (OCI), which includes securities valuated on FVOCI and the foreign currency translation reserves. Probability 1% 5% 25% 50% 25% 5% 1% 2021 In HUF billion Effects to the P&L in 3 months period 2022 In HUF billion (4,582) (2,470) (786) 14 999 2,700 4,233 (178) (119) (39) 2 49 126 187 Notes: (1) Historical VaR simulation is based on the empirical distribution of the historical exchange rate movements between 31 December 2022 and 31 December 2021. INTEGRATED ANNUAL REPORT 2022 304 OTP BANK IFRS REPORT (SEPARATE) NOTE 36: FINANCIAL RISK MANAGEMENT (in HUF mn) [continued] 36.5. Market risk [continued] 36.5.3. Interest rate sensitivity analysis The sensitivity analyses below have been determined based on the exposure to interest rates for both derivatives and non-derivative instruments at the balance sheet date. The analysis is prepared assuming the amount of assets and liabilities outstanding at the balance sheet date was outstanding for the whole year. The analysis was prepared by assuming only adverse interest rate changes. The main assumptions were as follows: ● Floating rate assets and liabilities were repriced to the modelled benchmark yields at the repricing dates assuming the unchanged margin compared to the last repricing. ● Fixed rate assets and liabilities were repriced at the contractual maturity date. ● As for liabilities with discretionary repricing feature by the Bank were assumed to be repriced with two- weeks delay, assuming no change in the margin compared to the last repricing date. ● Deposits with an interest rate lower than 0.3% even at high market rates were assumed to be unchanged for the whole period. The sensitivity of interest income to changes in BUBOR was analysed by assuming two interest rate path scenarios: (1) HUF base rate and BUBOR increases gradually by 100 bps over the next year (probable scenario) (2) HUF base rate and BUBOR decreases gradually by 50 bps over the next year (alternative scenario) The net interest income in a one year period after 1 January 2023 would be decreased by HUF 6,304 million (scenario 1) and increased by HUF 3,058 million (scenario 2) as a result of these simulation.The same simulation indicated HUF 1,238 million increase (scenario 1) and HUF 919 million decrease (scenario 2) in the Net interest income in a one year period after 1 January 2022. This effect is further increased by capital gains HUF -350 million (or scenario 1), HUF 181 million (for scenario 2) as at 31 December 2022 and (HUF -619 million for scenario 1, HUF +322 million for scenario 2 as at 31 December 2021) on the government bond portfolio held for hedging (economic). Furthermore, the effects of an instant 10bps parallel shift of the HUF, EUR and USD yield-curves on net interest income over a one-year period and on the market value of the hedge government bond portfolio booked against capital was analysed. The results can be summarized as follows (in HUF million): Description 2022 2021 Effects to the net interest income (one- year period) 1,105 (1,105) (383) 935 (1,106) (554) Effects to shareholder’s equity (Price change of FVOCI government bonds) 36 (36) - - - - Effects to the net interest income (one-year period) (25) (40) (483) (23) - (571) Effects to shareholder’s equity (Price change of FVOCI government bonds) 64 (64) - - - - HUF (0.1%) parallel shift HUF 0.1% parallel shift EUR (0.1%) parallel shift USD (0.1%) parallel shift USD 0.1% parallel shift Total 36.5.4. Equity price sensitivity analysis The following table shows the effect of the equity price sensitivity. The Bank uses VaR calculation with 1 day holding period and a 99% confidence level. The VaR methodology is a statistically defined, probability-based approach that takes into account market volatilities as well as risk diversification by recognizing offsetting positions and correlations between products and markets. The daily loss will not exceed the reported VaR number with 99% of probability. The stress test assumes the largest price movement of the last year and calculates with it as the adverse direction. These scenarios show the loss of the portfolio when all prices change with the maximum amount of the last year. Description VaR (99%, one day, million HUF) Stress test (million HUF) INTEGRATED ANNUAL REPORT 2022 2022 15 (26) 2021 12 (21) 305 OTP BANK IFRS REPORT (SEPARATE) NOTE 36: FINANCIAL RISK MANAGEMENT (in HUF mn) [continued] 36.6 Capital management Capital management The primary objective of the capital management of the Bank is to ensure the prudent operation, the entire compliance with the prescriptions of the regulator for a persistent business operation and maximising the shareholder value, accompanied by an optimal financing structure. The capital management of the Bank includes the management and evaluation of the shareholders` equity available for hedging risks, other types of funds to be recorded in the equity and all material risks to be covered by the capital. The basis of the capital management of the Bank in the short run is the continuous monitoring of its capital position, in the long run the strategic and the business planning, which includes the monitoring and forecast of the capital position of the Bank. The Bank maintains the capital adequacy required by the regulatory bodies and the planned risk taking mainly by means of ensuring and developing its profitability. In case the planned risk level of the Bank exceeded its Core and Supplementary capital, the Bank ensures the prudent operation by occasional measures. A further tool in the capital management of the Bank is the dividend policy, and the transactions performed with the treasury shares. Capital adequacy75 The Capital Requirements Directive package (CRDIV/CRR) transposes the global standards on banking regulation (commonly known as the Basel III agreement) into the EU legal framework. The rules are applied from 1 January 2014. They set stronger prudential requirements for institutions, requiring them to keep sufficient capital reserves and liquidity. This framework makes institutions in the EU more solid and strengthens their capacity to adequately manage the risks linked to their activities, and absorb any losses they may incur in doing business. The Bank has entirely complied with the regulatory capital requirements in 2022 as well as in 2021. The Bank’s capital adequacy calculation is in line with IFRS and based on Basel III as at 31 December 2022 and 31 December 2021. The Bank uses the standard method for determining the regulatory capital requirements of the credit risk and market risk while in case of the operational risk the Advanced Measurement Approach (AMA). Core capital (Tier 1) Primary core capital (CET1) Supplementary capital (Tier 2) Regulatory capital Credit risk capital requirement Market risk capital requirement Operational risk capital requirement Total eligible regulatory capital Surplus capital CET 1 ratio Capital adequacy ratio Basel III: Common equity Tier 1 capital (CET1): 2022 Basel III 1,632,037 1,632,037 286,181 1,918,218 742,536 26,530 31,440 800,506 1,117,712 16.31% 19.17% 2021 Basel III 1,747,480 1,747,480 264,396 2,011,876 603,253 7,519 31,629 642,401 1,369,475 21.76% 25.05% Issued capital, Capital reserve, useable part of Tied-up reserve, General reserve, Profit reserve, Profit for the year, Treasury shares, Intangible assets, deductions due to investments, adjustments due to temporary disposals Tier 2 capital: Subsidiary loan capital, Subordinated loan capital, deductions due to repurchased loan capital and Subordinated loan capital issued by the OTP Bank, adjustments due to temporary disposals. 75 The dividend amount planned to pay out / paid out is deducted from reserves. INTEGRATED ANNUAL REPORT 2022 306 OTP BANK IFRS REPORT (SEPARATE) NOTE 37: TRANSFER OF FINANCIAL INSTRUMENTS (in HUF mn) Financial assets transferred but not derecognised Financial assets at fair value through other comprehensive income Debt securities Total Financial assets at amortised cost Debt securities Total Total 31 December 2022 31 December 2021 Associated liabilities Transferred assets Associated liabilities Transferred assets Carrying amount 95,493 95,493 381,356 381,356 476,849 95,900 95,900 312,466 312,466 408,366 - - 88,181 88,181 88,181 - - 86,580 86,580 86,580 As at 31 December 2022 and 2021, the Bank had obligation from repurchase agreements about HUF 408 billion and HUF 87 billion respectively. Securities sold temporarily under repurchase agreements will continue to be recognized in the Statement of Financial Position of the Bank in the appropriate securities category. The related liability is measured at amortized cost in the Statement of Financial Position as ’Amounts due to banks and deposits from the National Bank of Hungary and other banks’. Under these repurchase agreements only Hungarian and foreign government bonds were transferred. NOTE 38: OFF-BALANCE SHEET ITEMS (in HUF mn) In the normal course of business, the Bank becomes a party to various financial transactions that are not reflected on the statement of financial position and are referred to as off-balance sheet financial instruments. The following represents notional amounts of these off-balance sheet financial instruments, unless stated otherwise. Contingent liabilities and commitments 2022 2021 Loan commitments Guarantees arising from banking activities from this: Payment undertaking liabilities (related to issue of mortgage bonds) of OTP Mortgage Bank Factoring loan commitments Confirmed letters of credit Contingent liabilities and commitments total in accordance with IFRS 9 Legal disputes (disputed value) Contingent liabilities related to payments from shares in venture capital fund Other Contingent liabilities and commitments total in accordance with IAS 37 Total 1,852,164 1,873,824 955,480 373,417 12,376 4,111,781 3,678 28,614 7 32,299 4,144,080 1,677,030 1,507,917 746,476 423,673 30,381 3,639,001 3,204 47,550 408 51,162 3,690,163 INTEGRATED ANNUAL REPORT 2022 307 OTP BANK IFRS REPORT (SEPARATE) NOTE 38: OFF-BALANCE SHEET ITEMS (in HUF mn) [continued] Legal disputes At the balance sheet date the Bank was involved in various claims and legal proceedings of a nature considered normal to its business. The level of these claims and legal proceedings corresponds to the level of claims and legal proceedings in previous years. The Bank believes that the various asserted claims and litigations in which it is involved will not materially affect its financial position, future operating results or cash flows, although no assurance can be given with respect to the ultimate outcome of any such claim or litigation. Provision due to legal disputes was HUF 1917 million and HUF 259 million as at 2022 and 2021, respectively. (See Note 24.) Commitments to extend credit, guarantees and letter of credit The primary purpose of these instruments is to ensure that funds are available to a customer as required. Guarantees and standby letters of credit, which represent irrevocable assurances that the Bank will make payments in the event that a customer cannot meet its obligations to third parties, carry the same credit risk as loans. Documentary and commercial letters of credit, which are written undertakings by the Bank on behalf of a customer authorising a third party to draw drafts on the Bank up to a stipulated amount under specific terms and conditions, are collateralised by the underlying shipments of goods to which they relate and therefore carry less risk than a direct borrowing. Commitments to extend credit represent unused portions of authorisations to extend credit in the form of loans, guarantees or letters of credit. With respect to credit risk on commitments to extend credit, the Bank is potentially exposed to loss in an amount equal to the total unused commitments. However, the likely amount of loss is less than the total unused commitments since most commitments to extend credit are contingent upon customers maintaining specific credit standards. Guarantees, irrevocable letters of credit and undrawn loan commitments are subject to similar credit risk monitoring and credit policies as utilised in the extension of loans. The Management of the Bank believes the market risk associated with guarantees, irrevocable letters of credit and undrawn loan commitments are minimal. Guarantees, payment undertakings arising from banking activities Payment undertaking is a promise by the Bank to assume responsibility for the debt obligation of a borrower if that borrower defaults until a determined amount and until a determined date, in case of fulfilling conditions, without checking the underlying transactions. The guarantee’s liability is joint and primary with the principal, in case of payment undertaking, while the Bank assumes the obligation derived from guarantee independently by the conditions established by the Bank. A guarantee is most typically required when the ability of the primary obligor or principal to perform its obligations under a contract is in question, or when there is some public or private interest which requires protection from the consequences of the principal's default or delinquency. Contingent liabilities related to OTP Mortgage Bank Ltd. Under a syndication agreement with its wholly owned subsidiary, OTP Mortgage Bank Ltd., the Bank had guaranteed, in return for an annual fee, to purchase all mortgage loans held by OTP Mortgage Bank Ltd. that become non-performing. The repurchase guarantee contract of non-performing loans between OTP Mortgage Bank Ltd. and OTP Bank Plc. was modified in 2010. According to the arrangement the repurchase guarantee was cancelled and OTP Bank Plc. gives bail to the loans originated or purchased by the Bank. INTEGRATED ANNUAL REPORT 2022 308 OTP BANK IFRS REPORT (SEPARATE) NOTE 39: SHARE-BASED PAYMENT AND EMPLOYEE BENEFIT (in HUF mn) Previously approved option program required a modification thanks to the introduction of the Bank Group Policy on Payments accepted in resolution of Annual General Meeting regarding to the amendment of CRD III. Directives and Act on Credit Institutions and Financial Enterprises. Key management personnel affected by the Bank Group Policy receive compensation based on performance assessment generally in the form of cash bonus and equity shares in a ratio of 50-50%. Assignment is based on OTP shares, furthermore performance based payments are deferred in accordance with the rules of Credit Institutions Act. OTP Bank ensures the share-based payment part for the management personnel of OTP Group members. During implementation of the Remuneration Policy of the Group it became apparent that in case of certain foreign subsidiaries it is not possible to ensure the originally determined share-based payment because of legal reasons – incompatible with relevant EU-directives –, therefore a decision was made to cancel the share-based payment in affected countries, and virtual share based payment – cash payment fixed to share price - was made from 2017. In case of foreign subsidiaries virtual share based payment was made uniformly from 2021 (in case of payments related to 2021). The quantity of usable shares for individuals calculated for settlement of share-based payment shall be determined as the ratio of the amount of share-based payment and share price determined by Supervisory Board. The value of the share-based payment at the performance assessment is determined within 10 days by Supervisory Board based on the average of the three previous trade day’s middle rate of OTP Bank’s equity shares fixed on the Budapest Stock Exchange. At the same time the conditions of discounted share-based payment are determined, and share-based payment shall contain maximum HUF 6,000 discount at the assessment date, and earnings for the shares at the payment date is maximum HUF 12,000. Employee benefits are all forms of consideration given by an entity in exchange for service rendered by employees or for the termination of employment. IAS 19 Employee Benefits shall be applied in accounting for all employee benefits, except those to which IFRS 2 Share-based Payment applies. Short-term employee benefits are employee benefits (other than termination benefits) that are expected to be settled wholly before twelve months after the end of the annual reporting period in which the employees render the related service. Post-employment benefits are employee benefits (other than termination and short-term employee benefits) that are payable after the completion of employment. Post-employment benefit plans are formal or informal arrangements under which an entity provides post-employment benefits for one or more employees. Post- employment benefit plans are classified as either defined contribution plans or defined benefit plans, depending on the economic substance of the plan as derived from its principal terms and conditions. Termination benefits are employee benefits provided in exchange for the termination of an employee’s employment as a result of either: an entity’s decision to terminate an employee’s employment before the normal retirement date or an employee’s decision to accept an offer of benefits in exchange for the termination of employment. Other long-term employee benefits are all employee benefits other than short-term employee benefits, postemployment benefits and termination benefits. INTEGRATED ANNUAL REPORT 2022 309 OTP BANK IFRS REPORT (SEPARATE) NOTE 39: SHARE-BASED PAYMENT AND EMPLOYEE BENEFIT (in HUF mn) [continued] The parameters for the share-based payment relating to ongoing years 2017-2021 for periods of each year as follows: Share purchasing at a discounted price Year Exercise price Maximum earnings per share Price of remuneration exchanged to share Share purchasing at a discounted price Exercise price Maximum earnings per share Price of remuneration exchanged to share Share purchasing at a discounted price Exercise price Maximum earnings per share Price of remuneration exchanged to share 2018 2019 2020 2021 2022 2023 2024 2025 2026 for the year 2017 3,000 3,500 4,000 4,000 4,000 - - - - 8,064 8,064 8,064 8,064 8,064 - - - - 10,064 10,064 10,064 10,064 10,064 - - - - - 10,413 10,413 10,413 10,913 10,913 10,913 10,913 - HUF per share for the year 2018 for the year 2019 - 4,000 4,000 4,000 4,000 4,000 4,000 4,000 - - 12,413 12,413 12,413 12,413 12,413 12,413 12,413 - - - 9,553 9,553 9,553 9,553 9,553 9,553 9,553 - - 4,000 4,000 4,000 4,000 4,000 4,000 4,000 - - 11,553 11,553 11,553 11,553 11,553 11,553 11,553 Share purchasing at a discounted price Price of remuneration exchanged to share Share purchasing at a discounted price Price of remuneration exchanged to share Exercise price Maximum earnings per share Exercise price Maximum earnings per share for the year 2020 for the year 2021 HUF per share 12,644 12,644 13,644 13,644 13,644 13,644 13,644 - 9,000 8,000 8,000 8,000 8,000 8,000 8,000 - 16,644 16,644 16,644 16,644 16,644 16,644 16,644 - - 5,912 6,912 6,912 6,912 6,912 6,912 6,912 - 6,000 7,000 8,000 9,000 10,000 10,000 10,000 - 8,912 8,912 8,912 8,912 8,912 8,912 8,912 Year 2021 2022 2023 2024 2025 2026 2027 2028 Relevant factors considered during measurement of fair value related to share-based payment as follows: Year 2017 2018 2019 2020 2021 2022 Reference price Assumed volatility 9,200 10,064 12,413 11,553 16,644 8,912 21.3% 26.0% 19.2% 33.6% 28.6% 42.6% 1Y 0.1% 0.2% 0.2% 0.6% 1.0% 7.1% 2Y 0.5% 0.6% 0.7% 0.4% 1.6% 7.9% Risk-free interest rate (HUF) 4Y 1.0% 1.3% 1.1% 0.6% 1.9% 7.3% 5Y 1.3% 1.6% 1.3% 0.8% 2.0% 7.1% 3Y 0.7% 1.0% 0.9% 0.5% 1.8% 7.6% 6Y 1.3% 1.9% 1.4% 0.9% 2.1% 7.0% 7Y 1.3% 2.1% 1.6% 1.0% 2.1% 6.9% INTEGRATED ANNUAL REPORT 2022 310 OTP BANK IFRS REPORT (SEPARATE) NOTE 39: SHARE-BASED PAYMENT AND EMPLOYEE BENEFIT (in HUF mn) [continued] Relevant factors considered during measurement of fair value related to share-based payment as follows: [continued] Year 2017 2018 2019 2020 2021 2022 1Y 219 219 252 219 371 452 ed divi Expec t 3Y 2Y dends 4Y (HUF/S 5Y hare) 6Y 7Y Pricing model 219 219 290 252 321 497 252 219 333 290 357 547 290 219 383 333 393 601 334 219 440 383 432 661 384 219 507 440 475 728 442 Binomial 219 Binomial 583 Binomial 507 Binomial 523 Binomial 800 Binomial Based on parameters accepted by Supervisory Board, relating to the year 2017 effective pieces are follows As at 31 December 2022: Approved pieces of shares Exercised until 31 December 2022 Weighted average share price at the date of exercise (in HUF) Expired pieces Exercisable at 31 December 2022 to to Share-purchasing period started in 2018 Remuneration exchanged share provided in 2018 Share-purchasing period started in 2019 share Remuneration exchanged provided in 2019 Share-purchasing period starting in 2020 Remuneration exchanged share applying in 2020 Share-purchasing period starting in 2021 Remuneration exchanged share applying in 2021 Share-purchasing period starting in 2022 Remuneration exchanged share applying in 2022 to to to 108,243 11,926 212,282 26,538 101,571 11,584 109,460 11,531 42,820 2,950 108,243 11,926 212,282 26,538 101,565 11,584 109,460 11,531 - 2,950 11,005 10,098 12,096 11,813 12,084 11,897 16,441 16,477 - 8,529 - - - - 6 - - - - - - - - - - - - - 42,820 - Based on parameters accepted by Supervisory Board, relating to the year 2018 effective pieces are follows As at 31 December 2022: to to to exchanged exchanged exchanged Share-purchasing period started in 2019 Remuneration share provided in 2019 Share-purchasing period starting in 2020 Remuneration share applying in 2020 Share-purchasing period starting in 2021 Remuneration share applying in 2021 Share-purchasing period starting in 2022 share Remuneration applying in 2022 Share-purchasing period starting in 2023 Remuneration share applying in 2023 Remuneration applying in 2024 Remuneration applying in 2025 exchanged exchanged exchanged exchanged share share to to to to Approved pieces of shares Exercised until 31 December 2022 Weighted average share price at the date of exercise (in HUF) Expired pieces Exercisable at 31 December 2022 82,854 17,017 82,854 17,017 150,230 150,230 33,024 73,799 14,618 86,456 13,858 - - - - 33,024 73,799 14,618 - 13,858 - - - - 13,843 11,829 14,294 11,897 16,314 16,468 - 8,529 - - - - - - - - - - - - - - - - - - - - - - 86,456 - 45,155 4,114 864 432 INTEGRATED ANNUAL REPORT 2022 311 OTP BANK IFRS REPORT (SEPARATE) NOTE 39: SHARE-BASED PAYMENT AND EMPLOYEE BENEFIT (in HUF mn) [continued] Based on parameters accepted by Supervisory Board, relating to the year 2019 effective pieces are follows As at 31 December 2022: Approved pieces of shares Exercised until 31 December 2022 Weighted average share price at the date of exercise (in HUF) Expired pieces Exercisable at 31 December 2022 Share-purchasing period started in 2020 Remuneration exchanged to share provided in 2020 Share-purchasing period starting in 2021 Remuneration exchanged to share applying in 2021 Share-purchasing period starting in 2022 Remuneration exchanged to share applying in 2022 Share-purchasing period starting in 2023 Remuneration exchanged to share applying in 2023 Share-purchasing period starting in 2024 Remuneration exchanged to share applying in 2024 Remuneration exchanged to share applying in 2025 Remuneration exchanged to share applying in 2026 91,403 22,806 91,403 22,806 201,273 201,273 30,834 30,834 107,760 - 12,218 11,897 16,298 17,618 - 10,564 10,564 8,529 - - - - - - - - - - - - - - - - - - - - - - - - - - 1,335 106,425 - - - - - - - - 125,771 18,025 44,421 6,279 1,000 500 Based on parameters accepted by Supervisory Board, relating to the year 2020 effective pieces are follows As at 31 December 2022: Approved pieces of shares Exercised until 31 December 2022 Weighted average share price at the date of exercise (in HUF) Expired pieces Exercisable at 31 December 2022 Share-purchasing period started in 2021 Remuneration exchanged to share provided in 2021 Share-purchasing period starting in 2022 Remuneration exchanged to share applying in 2022 Share-purchasing period starting in 2023 Remuneration exchanged to share applying in 2023 Share-purchasing period starting in 2024 Remuneration exchanged to share applying in 2024 Share-purchasing period starting in 2025 Remuneration exchanged to share applying in 2025 Remuneration exchanged to share applying in 2026 Remuneration exchanged to share applying in 2027 41,098 17,881 83,688 15,232 - - - - - - - - 14,142 17,881 - 17,997 17,498 - 26,956 - - - 1,288 82,400 14,743 8,529 - - - - - - - - - - - - - - - - - - - - - - - - - 489 47,826 9,292 51,002 9,518 13,080 3,443 680 680 INTEGRATED ANNUAL REPORT 2022 312 OTP BANK IFRS REPORT (SEPARATE) NOTE 39: SHARE-BASED PAYMENT AND EMPLOYEE BENEFIT (in HUF mn) [continued] Based on parameters accepted by Supervisory Board, relating to the year 2021 effective pieces are follows As at 31 December 2022: Approved pieces of shares Exercised until 31 December 2022 Weighted average share price at the date of exercise (in HUF) Share-purchasing period started in 2022 Remuneration exchanged to share provided in 2022 Share-purchasing period starting in 2023 Remuneration exchanged to share applying in 2023 Share-purchasing period starting in 2024 Remuneration exchanged to share applying in 2024 Share-purchasing period starting in 2025 Remuneration exchanged to share applying in 2025 Share-purchasing period starting in 2026 Remuneration exchanged to share applying in 2026 Share-purchasing period starting in 2027 Remuneration exchanged to share applying in 2027 60,018 11,028 59,776 10,708 10,122 8,537 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - Expired pieces Exercisable at 31 December 2022 242 - - - - - - - - - - - - 320 117,276 10,824 50,829 4,942 54,324 4,942 58,222 4,942 25,305 631 Effective pieces relating to the periods starting in 2023-2027 settled during valuation of performance of year 2018- 2021, can be modified based on risk assessment and personal changes. In connection with the share-based compensation for Board of Directors and connecting compensation, shares given as a part of payments detailed above and for the year 2022 based on performance assessment accounted as equity-settled share based transactions HUF 2,948 million was recognized as expense for the year ended 31 December 2022. INTEGRATED ANNUAL REPORT 2022 313 OTP BANK IFRS REPORT (SEPARATE) NOTE 40: RELATED PARTY TRANSACTIONS (in HUF mn) Outstanding balances and transactions with related parties are summarized below in aggregate: Statement of financial position 2022 Associated companies and other companies 2021 Other related parties Associated companies and other companies Other related parties Cash, amounts due from banks and balances with the National Bank of Hungary Placements with other banks Repo receivables Held for trading securities Held for trading derivative financial instruments: Financial assets at fair value through other comprehensive income Securities at amortised cost Loans at amortised cost Loans mandatorily measured at fair value through profit or loss Right of use assets Derivative financial assets designated as hedge accounting relationships Other assets Total Assets Amounts due to banks and deposits from the National Bank of Hungary and other banks Repo liabilities Deposits from customers Leasing liabilities Liabilities from issued securities Derivative financial liabilities designated as held for trading Derivative financial liabilities designated as hedge accounting relationships Other liabilities Total Liabilities Off balance sheet items Guarantees Loan commitments Factoring loan commitments Total 83,713 2,019,597 205,520 11 55,989 302,121 - 997,027 - 21,615 1,625 136,361 3,823,579 - - - - - - 601 65,767 44 - - 375 66,787 1,675 1,557,437 - 16 19,397 156,162 - 960,288 - 5,713 - - - - - - 596 105,503 9 - (9) 101,569 2,802,248 - 5 106,113 (863,748) (191,102) (271,214) (22,129) (11,093) - - (58,217) - - (115,042) (36,854) (263,139) (5,926) (12,232) - - (27,174) - - (40,225) - (5,344) - - (14,836) (1,414,347) - (491) (58,708) (61) (4,599) (443,197) - (551) (27,725) (1,208,669) (72,161) (1,085) (1,281,915) (7,824) (43,324) (8,763) (59,911) (921,818) (85,810) (1,475) (1,009,103) - (44,812) - (44,812) INTEGRATED ANNUAL REPORT 2022 314 OTP BANK IFRS REPORT (SEPARATE) NOTE 40: RELATED PARTY TRANSACTIONS (in HUF mn) [continued] Outstanding balances and transactions with related parties are summarized below in aggregate: [continued] Statement of Profit or Loss Interest Income Interest Expense Risk cost (Losses)/Gains arising from derecognition of financial assets measured at amortised cost Income from fees and commissions Expenses from fees and commissions Other administrative expenses Related party transactions with key management Year ended 31 December 2022 Year ended 31 December 2021 181,369 (93,185) 70,147 (49,745) 18,742 (3,038) (9,761) 42,706 (11,449) 904 (2,198) 33,128 (2,859) (7,570) The compensation of key management, such as the members of the Board of Directors, the members of the Supervisory Board and the employees involved in the decision-making process in accordance with the compensation categories defined in IAS 24 Related Party Disclosures, is summarised below: Short-term employee benefits Share-based payment Long-term employee benefits (on the basis of IAS 19) Total 2022 2,986 2,225 239 5,450 2022 2021 2,957 2,740 246 5,943 2021 Loans provided to companies owned by the Management (in the normal course of business) Commitments to extend credit and bank guarantees 65,767 59,911 105,503 44,812 An analysis of payment to Executives related to their activity in Board of Directors and Supervisory Board is as follows (in HUF mn): Members of Board of Directors Members of Supervisory Board Total 2022 1,180 198 1,378 2021 1,489 173 1,662 In the normal course of business, OTP Bank enters into other transactions with its subsidiaries, the amounts and volumes of which are not significant to these financial statements taken as a whole. INTEGRATED ANNUAL REPORT 2022 315 OTP BANK IFRS REPORT (SEPARATE) NOTE 41: TRUST ACTIVITIES (in HUF mn) The Bank acts as a trustee for certain loans granted by companies or employers to their employees, mainly for housing purposes. The ultimate risk for these loans rests with the party advancing the funds. As these loans and related funds are not considered to be assets or liabilities of the Bank, they have been excluded from the accompanying separate statement of financial position. Loans managed by the Bank as a trustee NOTE 42: CONCENTRATION OF ASSETS AND LIABILITIES In the percentage of the total assets Receivables from, or securities issued by the Hungarian Government or the NBH Securities issued by the OTP Mortgage Bank Ltd. Loans at amortised cost 2022 2021 27,914 27,532 2022 2021 23.58% 2.30% 5.26% 22.79% 1.77% 6.51% There were no other significant concentrations of the assets or liabilities of the Bank as at 31 December 2022 or 2021. OTP Bank continuously provides the Authority with reports on the extent of dependency on large depositors as well as the exposure of the largest 50 depositors towards OTP Bank. Further to this obligatory reporting to the Authority. OTP Bank pays particular attention on the exposure of its largest partners and cares for maintaining a closer relationship with these partners in order to secure the stability of the level of deposits. The organisational unit of OTP Bank in charge of partner-risk management analyses the largest partners on a constant basis and sets limits on OTP Bank’s and the Group’s exposure separately partner-by-partner. If necessary, it modifies partner-limits in due course thereby reducing the room for manoeuvring of the Treasury and other business areas. The Bank’s internal regulation (Limit-management regulation) controls risk management which related to exposures of clients. Bank makes a difference between clients or clients who are economically connected with each other, partners, partners operating in the same geographical region or in the same economic sector, exposures from customers. Limit-management regulation includes a specific range provisions system used by Bank to control risk exposures. This regulation has to be used by the Bank for its business (lending) risk-taking activity in both the retail and corporate sector. To specify credit risk limits, the Bank strives their clients get an acceptable margin of risk based on their financial situation. In the Bank limit system a lower level decision-making delegation has to be provided. If an OTP group member takes risk against a client or group of clients (either inside the local economy or outside), the client will be qualified as a group level risk and these limits will be specified at group level. The validity period of this policy is 12 months. The limit shall be reviewed prior to the expiry date but at least once a year based on the relevant information required to limit calculations. The maximum credit exposure to any client or counterparty among Loans at amortised cost was HUF 871 billion and HUF 893 billion as at 31 December 2022 and 2021 respectively, before taking into account collateral or other credit enhancements. INTEGRATED ANNUAL REPORT 2022 316 OTP BANK IFRS REPORT (SEPARATE) NOTE 43: EARNINGS PER SHARE Earnings per share attributable to the Bank’s ordinary shares are determined by dividing Net profit for the year attributable to ordinary shareholders, after the deduction of declared preference dividends, by the weighted average number of ordinary shares outstanding during the year. Dilutive potential ordinary shares are deemed to have been converted into ordinary shares. Net profit for the year attributable to ordinary shareholders (in HUF mn) Weighted average number of ordinary shares outstanding during the year for calculating basic EPS (number of share) Basic Earnings per share (in HUF) Separate net profit for the year attributable to ordinary shareholders (in HUF mn) Modified weighted average number of ordinary shares outstanding during the year for calculating diluted EPS (number of share) Diluted Earnings per share (in HUF) Weighted average number of ordinary shares Average number of Treasury shares Weighted average number of ordinary shares outstanding during the year for calculating basic EPS Dilutive effect of options issued in accordance with / the Remuneration Management Option Program and convertible into ordinary shares Policy The modified weighted average number of ordinary shares outstanding during the year for calculating diluted EPS 2022 6,632 278,795,018 24 6,632 278,797,915 24 2022 280,000,010 (1,204,992) 2021 125,339 275,523,535 455 125,339 275,538,262 455 2021 280,000,010 (4,476,475) 278,795,018 275,523,535 2,896 14,727 278,797,914 275,538,262 INTEGRATED ANNUAL REPORT 2022 317 OTP BANK IFRS REPORT (SEPARATE) NOTE 44: NET GAIN OR LOSS REALISED ON FINANCIAL INSTRUMENTS (in HUF mn) Net interest income and expense Net non-interest gain and loss Loss allowance Other comprehensive income 50,964 203,618 10,234 297,460 92,948 - - - 11,643 (54,402) - 11,754 2,095 33,838 27,623 655,224 (42,759) 75,310 - - - - - - - 3,556 39,988 35,927 79,471 6,480 - (7,952)1 25,615 (53,068) (20,188) (21,660) (11,872) 13,743 - (53,068) Year ended 31 December 2022 Financial assets measured at amortised cost Cash, amounts due from banks and balances with the National Bank of Hungary Placements with other banks Repo receivables Loans Securities at amortised cost Financial assets measured at amortised cost total Financial assets measured at fair value Securities held for trading Securities at fair value through other comprehensive income Loans mandatorily measured at fair value through profit or loss Financial assets measured at fair value total Financial liabilities measured at amortised cost Amounts due to banks and deposits from the National Bank of Hungary and other banks Repo liabilities Deposits from customers Leasing liabilities Liabilities from issued securities Subordinated bonds and loans Financial liabilities measured at amortised (19,806) (65,575) (184,713) (1,186) (7,442) (8,646) - - 213,359 - - - - - - - - - - - - - - - - - - - - - cost total (287,368) 213,359 Financial liabilities designated to measure at fair value through profit or loss Derivative financial instruments2 (562) (146,192) 1,932 9,917 Total 300,573 160,789 89,053 (53,068) 1 For the year ended 31 December 2022 HUF (7,952) million net non-interest gain on securities at fair value through other comprehensive income was transferred from other comprehensive income to profit or loss. 2 Gains/losses from derivative financial instruments recognised in net interest income as Income similar to interest income. INTEGRATED ANNUAL REPORT 2022 318 OTP BANK IFRS REPORT (SEPARATE) NOTE 44: NET GAIN OR LOSS REALISED ON FINANCIAL INSTRUMENTS (in HUF mn) [continued] Year ended 31 December 2021 Financial assets measured at amortised cost Cash, amounts due from banks and balances with the National Bank of Hungary Placements with other banks Repo receivables Loans Securities at amortised cost Financial assets measured at amortised cost total Financial assets measured at fair value Securities held for trading Securities at fair value through other Net interest income and expense Net non-interest gain and loss Loss allowance Other comprehensive income 14,124 31,981 315 167,882 61,085 - - - 13,591 (1,552) - 1,797 (220) 37,264 2,035 275,387 12,039 40,876 277 6,657 - - - - - - - - comprehensive income Loans mandatorily measured at fair value through profit or loss Financial assets measured at fair value total 21,456 26,045 47,778 (4,659)1 (551) (35,756) (8,671) (6,673) 16,255 15,704 - (35,756) Financial liabilities measured at amortised cost Amounts due to banks and deposits from the National Bank of Hungary and other banks Repo liabilities Deposits from customers Leasing liabilities Liabilities from issued securities Subordinated bonds and loans Financial liabilities measured at amortised cost total Financial liabilities designated to measure at fair value through profit or loss Derivative financial instruments2 (11,177) (2,860) (10,162) (214) (1,166) (7,890) - - 170,598 - - - (33,469) 170,598 (493) (36,295) 3,916 3,436 - - - - - - - - - - - - - - - - - - Total 252,908 183,316 56,580 (35,756) 1 For the year ended 31 December 2022 HUF (7,952) million net non-interest gain on securities at fair value through other comprehensive income was transferred from other comprehensive income to profit or loss. 2 Gains/losses from derivative financial instruments recognised in net interest income as Income similar to interest income. INTEGRATED ANNUAL REPORT 2022 319 OTP BANK IFRS REPORT (SEPARATE) NOTE 45: FAIR VALUE OF FINANCIAL INSTRUMENTS (in HUF mn) In determining the fair value of a financial asset or liability the Bank in the case of instruments that are quoted on an active market uses the market price. In most cases market price is not publicly available so the Bank has to make assumptions or use valuation techniques to determine the fair value of a financial instrument. See Note 45. d) for more information about fair value classes applied for financial assets and liabilities measured at fair value in these financial statements. To provide a reliable estimate of the fair value of those financial instrument that are originally measured at amortised cost, the Bank used the discounted cash flow analysis (loans, placements with other banks, amounts due to banks, deposits from customers). The fair value of issued securities and subordinated bonds is based on quoted prices (e,g, Reuters), Cash and amounts due from banks and balances with the National Bank of Hungary represent amounts available immediately thus the fair value equals to the cost. The assumptions used when calculating the fair value of financial assets and liabilities when using valuation technique are the following: • • • • the discount rates are the risk free rates related to the denomination currency adjusted by the appropriate risk premium as of the end of the reporting period, the contractual cash flows are considered for the performing loans and for the non-performing loans, the amortised cost less impairment is considered as fair value, the future cash flows for floating interest rate instruments are estimated from the yield curves as of the end of the reporting period, the fair value of the deposit which can be due in demand cannot be lower than the amount payable on demand. For classes of assets and liabilities not measured at fair value in the statement of financial position, the income approach was used to convert future cash flows to a single current amount. Fair value of current assets is equal to carrying amount, fair value of liabilities from issued securities and other bond-type classes of assets and liabilities not measured at fair value measured based on Reuters market rates and, fair value of other classes not measured at fair value of the statement of financial position are measured using the discounted cash flow method. Fair value of loans, net of allowance for loan losses measured using discount rate adjustment technique, the discount rate is derived from observed rates of return for comparable assets or liabilities that are traded in the market. Fair value measurements – in relation to instruments measured not at fair value – are categorized in level 3 of the fair value hierarchy. Use of modified yield curve During the year ended 31 December 2022 yield curves derived from hungarian government bonds (“ÁKK curve”) have become distorted due to certain market events, which means that real liquidity has concentrated on certain part of the yield curve. Therefore a modified yield curve - which is not observable on the market - has been used at the concerning fair value calculations. This yield curve is based on the relevant yield curve points of the original ÁKK curve. Based on Management’s discretion fair value calculated with modified yield curves can represent the perspective of market participants reliable at current market conditions. Modified yield curve was used for calculating fair value in case of subsidised personal loans represented in “Loans mandatorily measured at fair value through profit or loss” line. INTEGRATED ANNUAL REPORT 2022 320 OTP BANK IFRS REPORT (SEPARATE) NOTE 45: FAIR VALUE OF FINANCIAL INSTRUMENTS (in HUF mn) [continued] a) Fair value of financial assets and liabilities Cash, amounts due from banks and balances with the National Bank of Hungary Placements with other banks Repo receivables Securities at amortised cost Loans at amortised cost Other financial assets Total assets measured not at fair value Financial assets at fair value through profit or loss Held for trading securities Derivative financial instruments classified as held for trading Securities mandatorily measured at fair value through profit or loss Equity instruments at fair value through other comprehensive income Securities at fair value through other comprehensive income Loans mandatorily measured at fair value through profit or loss Derivative financial assets designated as hedge accounting relationships Total assets measured at fair value FINANCIAL ASSETS TOTAL Amounts due to banks, deposits from the National Bank of Hungary and other banks Repo liabilities Deposits from customers Leasing liabilities Liabilities from issued securities Subordinated bonds and loans Other financial liabilities Total liabilities measured not at fair value Financial liabilities at fair value through profit or loss Derivative financial liabilities designated as held for trading Derivative financial liabilities designated as hedge accounting relationships Total liabilities measured at fair value FINANCIAL LIABILITIES TOTAL b) Derivative financial instruments 2022 2021 Carrying amount Fair value Carrying amount Fair value 1,092,198 2,899,829 246,529 3,282,373 4,825,040 255,125 12,601,094 410,012 74,795 1,092,198 2,871,307 248,513 2,654,685 4,480,127 255,125 11,601,955 410,012 74,795 474,945 2,567,212 33,638 3,071,038 4,032,465 153,747 10,333,045 246,462 35,633 474,945 2,548,809 33,707 2,877,380 3,576,519 153,747 9,665,107 246,462 35,633 304,719 304,719 182,768 182,768 30,498 30,498 17,922 17,922 28,061 17,138 28,061 17,138 779,253 779,253 624,801 624,801 793,242 793,242 662,012 662,012 47,220 2,047,649 14,648,743 47,220 2,047,649 13,649,604 17,727 1,568,140 11,901,185 17,727 1,568,140 11,233,247 1,736,128 408,366 11,119,158 41,464 498,709 294,186 282,103 14,380,114 16,576 1,559,492 415,703 11,122,775 41,477 493,440 261,113 282,103 14,176,104 16,576 1,051,203 86,580 9,948,532 17,932 22,153 271,776 194,511 11,592,687 20,133 958,463 86,543 9,946,444 17,928 21,006 278,151 194,511 11,503,046 20,133 373,401 373,401 192,261 192,261 50,623 440,600 14,820,714 50,623 440,600 14,616,704 18,690 231,084 11,823,771 18,690 231,084 11,734,130 OTP Bank regularly enters into hedging transactions in order to decrease its financial risks. However some economically hedging transaction do not meet the criteria to account for hedge accounting, therefore these transactions were accounted as derivatives held for trading. Net investment hedge in foreign operations is not applicable in separate financial statements. The assessment of the hedge effectiveness (both for fair value hedges and cash flow hedges) to determine the economic relationship between the hedged item and the hedging instrument is accomplished with prospective scenario analysis via different rate shift scenarios of the relevant risk factor(s) of the hedged risk component(s). The fair value change of the hedged item and the hedging instrument is compared in the different scenarios. Economic relationship is justified if the change of the fair value of the hedged item and the hedging instrument are in the opposite direction and the absolute changes are similar amounts. The hedge ratio is determined as the ratio of the notional of the hedged item and the notional of the hedging instrument. The sources of hedge ineffectiveness are the not hedged risk components (e.g. change of cross currency basis spreads in case of interest rate risk hedges), slight differences in maturity dates and interest payment dates in case of fair value hedges, and differences between the carrying amount of the hedged item and the carrying amount of the hedging instrument in case of FX hedges (e.g. caused by interest rate risk components in the fair value of the hedging instrument). INTEGRATED ANNUAL REPORT 2022 321 OTP BANK IFRS REPORT (SEPARATE) NOTE 45: FAIR VALUE OF FINANCIAL INSTRUMENTS (in HUF mn) [continued] b) Derivative financial instruments [continued] Fair value of derivative financial instruments1 The Bank has the following held for trading derivatives and derivatives designated as hedge accounting: Held for trading derivative financial instruments Interest rate derivatives Interest rate swaps Cross currency interest rate swaps OTC options Forward rate agreement Total interest rate derivatives (OTC derivatives) From this: Interest rate derivatives cleared by NBH Foreign exchange derivatives Foreign exchange swaps Foreign exchange forward OTC options Foreign exchange spot conversion Total foreign exchange derivatives (OTC derivatives) From this: Foreign exchange derivatives cleared by NBH Before netting Assets Liabilities 2022 Netting After netting Before netting Assets Liabilities Assets Liabilities 2021 Netting After netting Assets Liabilities 162,519 11,332 1,000 505 175,356 2,702 109,167 9,909 1,048 162 120,286 22,214 (170,144) (12,139) (1,000) (3) (183,286) - (76,037) (11,936) (822) (162) (88,957) - 155,468 - - 505 155,973 - - - - - - - 7,051 11,332 1,000 - 19,383 2,702 109,167 9,909 1,048 162 120,286 22,214 (14,676) (12,139) (1,000) 502 (27,313) - (76,037) (11,936) (822) (162) (88,957) - 54,251 7,207 479 - 61,937 1,276 36,896 8,854 804 175 46,729 3,447 (53,720) (7,618) (479) - (61,817) - (40,639) (6,819) (180) (246) (47,884) (1,480) 40,783 - - - 40,783 - - - - - - - 13,468 7,207 479 - 21,154 1,276 36,896 8,854 804 175 46,729 3,447 (12,937) (7,618) (479) - (21,034) - (40,639) (6,819) (180) (246) (47,884) (1,480) 1 Certain derivative financial assets and liabilities are offset and the net amount is presented in accordance with IAS 32 in the Statement of Financial Position. The Bank has the ability and the intention to settle those instruments on a net basis, which are settled through the same clearing house. INTEGRATED ANNUAL REPORT 2022 322 OTP BANK IFRS REPORT (SEPARATE) NOTE 45: FAIR VALUE OF FINANCIAL INSTRUMENTS (in HUF mn) [continued] b) Derivative financial instruments [continued]1 Fair value of derivative financial instruments [continued] Equity stock and index derivatives Commodity Swaps Equity swaps OTC derivatives Exchange traded futures and options Total equity stock and index derivatives Derivatives held for risk management not designated in hedges Interest rate swaps Foreign exchange swaps Forward Cross currency interest rate swaps Total derivatives held for risk management not designated in hedges From this: Total derivatives cleared by NBH held for risk management Total Held for trading derivative financial instruments Derivative financial instruments designated as hedge accounting relationships Derivatives designated in cash flow hedges Interest rate swaps Total derivatives designated in cash flow hedges Derivatives designated in fair value hedges Interest rate swaps Cross currency interest rate swaps Foreign exchange swaps Total derivatives designated in fair value hedges From this: Total derivatives cleared by NBH held for hedging Total derivatives held for risk management (OTC derivatives) Before netting Assets Liabilities 2022 Netting After netting Before netting Assets Liabilities Assets Liabilities 2021 Netting After netting Assets Liabilities 34,058 54 34,112 214 34,326 133,399 12,687 67 3,515 149,668 78,916 479,636 - - 58,381 20,732 1,696 80,809 - 80,809 (32,048) (702) (32,750) (1,887) (34,637) (225,915) (11,908) - (3,572) (241,438) (1,879) (548,318) (25,325) (25,325) (37,290) (5,398) (16,199) (58,887) (5,485) (84,212) - - - - - 18,944 - - - 18,944 - 174,917 2,651 2,651 30,938 - - 30,938 - 33,589 34,058 54 34,112 214 34,326 114,455 12,687 67 3,515 130,724 78,916 304,719 (2,651) (2,651) 27,443 20,732 1,696 49,871 - 47,220 (32,048) (702) (32,750) (1,887) (34,637) (206,971) (11,908) - (3,572) (222,494) (1,879) (373,401) (22,674) (22,674) (6,352) (5,398) (16,199) (27,949) (5,485) (50,623) 52,197 10,538 62,735 164 62,899 51,311 1,915 - 4,442 (52,166) (357) (52,523) (278) (52,801) (70,811) (5,245) - (168) 57,668 35,226 229,233 (76,224) (497) (238,726) - - 25,407 5,471 - 30,878 - 30,878 (8,638) (8,638) (17,878) (5,325) - (23,203) (2,249) (31,841) - - - - - 5,682 - - - 5,682 - 46,465 1,020 1,020 12,131 - - 12,131 - 13,151 52,197 10,538 62,735 164 62,899 45,629 1,915 - 4,442 (52,166) (357) (52,523) (278) (52,801) (65,129) (5,245) - (168) 51,986 35,226 182,768 (70,542) (497) (192,261) (1,020) (1,020) 13,276 5,471 - 18,747 - 17,727 (7,618) (7,618) (5,747) (5,325) - (11,072) (2,249) (18,690) 1 Certain derivative financial assets and liabilities are offset and the net amount is presented in accordance with IAS 32 in the Statement of Financial Position. The Bank has the ability and the intention to settle those instruments on a net basis, which are settled through the same clearing house. INTEGRATED ANNUAL REPORT 2022 323 OTP BANK IFRS REPORT (SEPARATE) NOTE 45: FAIR VALUE OF FINANCIAL INSTRUMENTS (in HUF mn) [continued] c) Hedge accounting Interest rate risk management is centralized at OTP Bank. Interest rate risk exposures in major currencies are managed at HQ on consolidated level. Although risk exposures in local currencies are managed at subsidiary level, the respective decisions are subject to HQ approval. Interest rate risk is measured by simulating NII and EVE under different stress and plan scenarios, the established risk limits are described in „OTP Bank’s Group-Level Regulations on the Management of Liquidity Risk and Interest Rate Risk of Banking Book”. The interest rate risk management activity aims to stabilize NII within the approved risk limits. The risk management objective of these hedge relationships is to mitigate the risk of clean fair value (i.e. excluding accrued interest) change of MIRS loans due to the change of interest rate reference indexes (BUBOR, EURIBOR, LIBOR, etc.) of the respective currency. Amount, timing and uncertainty of future cash flows - hedging instruments as at 31 December 2022 (amounts in million currency) Type of hedge Type of risk Type of instrument Fair Value Hedge Interest rate risk Interest rate swap Within one month Within three months and over one month Within one year and over three months Within five years and over one year More than five years Total HUF Notional Average Interest Rate (%) EUR Notional Average Interest Rate (%) USD Notional Average Interest Rate (%) JPY Notional Average Interest Rate (%) Cross currency interest rate swap EUR/HUF Notional Average Interest Rate (%) Average FX Rate - - - - - - - - - (1.64%) 310.41 - - - - 90 2.60% - - 1 (1.68%) 310.17 - - 101 0.24% - - - - (64,875) 7.15% 30,300 (34,575) 1.40% 10 0.22% 29 2.35% 4,500 0.22% 50 0.05% 47 4.18% 161 166 4,500 - - 2 (1.68%) 310.20 10 (1.71%) 309.74 11 (1.82%) 307.71 24 Fair Value Hedge FX & IR risk INTEGRATED ANNUAL REPORT 2022 324 OTP BANK IFRS REPORT (SEPARATE) NOTE 45: FAIR VALUE OF FINANCIAL INSTRUMENTS (in HUF mn) [continued] c) Hedge accounting [continued] Amount, timing and uncertainty of future cash flows - hedging instruments as at 31 December 2022 (amounts in million currency) [continued] Type of hedge Type of risk Type of instrument Fair Value Hedge FX risk Cross currency interest rate swap Within one month Within three months and over one month Within one year and over three months Within five years and over one year More than five years Total EUR/HUF Notional Average FX Rate RON/HUF Notional Average FX Rate JPY/HUF Notional Average FX Rate USD/HUF Notional Average FX Rate Interest rate swap HUF Notional Fair Value Hedge Other Cash flow Hedge Interest rate risk Interest rate swap HUF Notional Average Interest Rate - 363.88 -10 407.57 125 362.11 400 72.92 - - 144 323.77 878 373.88 3,121 75.08 4,500 2.79 146 323.77 993 3,521 4,500 283 - - - - - - - - - - - - -7 323.77 1,323 198 778 - 5,585 794 1.13 3,203 1.93 - - 28,027 2.46 32,024 - - - - - - - - - INTEGRATED ANNUAL REPORT 2022 325 OTP BANK IFRS REPORT (SEPARATE) NOTE 45: FAIR VALUE OF FINANCIAL INSTRUMENTS (in HUF mn) [continued] c) Hedge accounting [continued] Amount, timing and uncertainty of future cash flows - hedging instruments as at 31 December 2021 (amounts in million currency) Type of hedge Type of risk Type of instrument Fair Value Hedge Interest rate risk Interest rate swap Within one month Within three months and over one month Within one year and over three months Within five years and over one year More than five years HUF Notional Average Interest Rate (%) EUR Notional Average Interest Rate (%) USD Notional Average Interest Rate (%) JPY Notional Average Interest Rate (%) Cross currency interest rate swap EUR/HUF Notional Average Interest Rate (%) Average FX Rate FX & IR risk FX risk Cross currency interest rate swap EUR/HUF Notional Average FX Rate RON/HUF Notional Average FX Rate RUB/HUF Notional Average FX Rate JPY/HUF Notional Average FX Rate USD/HUF Notional Average FX Rate Other Interest rate swap HUF Notional Interest rate risk Interest rate swap HUF Notional Average Interest Rate - - - - - - - - - (1.64%) 310.41 - 363.88 - - - - - - - - - - - 2,000 1.09% - - - - - - 1 (1.68%) 310.29 (6) 354.22 - - - - - - - - 900 0.49% 1 0.23% - - - - 2 (1.67%) 310.26 35 356.94 200 66.21 - - - - (3) 323.77 (52,474) 1.65% 42,950 1.31% (6,624) 111 0.24% 119 2.54% 4,500 0.22% 50 162 0.05% 47 166 4.18% 4,500 - - 12 (1.69%) 310.01 12 27 (1.82%) 307.81 572 355.93 2,225 73.08 11,200 4.15 4,500 2.79 306 323.77 601 2,425 11,200 4,500 303 - - - - - - - - - - 3,345 1,823 3,093 - 8,261 - - - - 7,819 1.80 28,027 35,846 2.46 INTEGRATED ANNUAL REPORT 2022 326 OTP BANK IFRS REPORT (SEPARATE) NOTE 45: FAIR VALUE OF FINANCIAL INSTRUMENTS (in HUF mn) [continued] c) Hedge accounting [continued] Derivative financial instruments designated as hedge accounting as follows: Type of instrument Type of risk Nominal amount of the hedging instrument Carrying amount of the hedging instrument for the year ended 31 December 2022 Before netting Assets Liabilities Netting After netting Assets Liabilities Line item in the statement of financial position where the hedging instrument is located Changes in fair value used for calculating hedge ineffectiveness for the year ended 31 December 2022 Interest rate risk 444,627 58,260 (37,258) 30,938 27,322 (6,320) management Derivative assets (liabilities) held for risk Fair value hedge Interest rate swap Cross-currency swap Cross-currency swap FX swap FX risk FX risk Interest rate swap Other Cash flow hedge FX & IR risk 7,292 - (2,679) 813,430 21,685 (2,719) 290,982 2,299 743 121 (16,199) (32) - - - - - 21,685 743 121 (2,679) (2,719) Derivative assets (liabilities) held for risk management Derivative assets (liabilities) held for risk management Derivative assets (liabilities) held for risk (16,199) management Derivative assets (liabilities) held for risk (32) management Derivative assets (liabilities) held for risk 12,873 3 (6,087) - 1 (101) Interest rate swap Interest rate risk 92,203 - (25,325) 2,651 (2,651) (22,674) management 31 December 2022 Type of risk Carrying amount of the hedged item Accumulated amount of fair value hedge adjustments on the hedged item included in the carrying amount of the hedged item Line item in the statement of financial position in which the hedged item is included Assets Liabilities Assets Liabilities Fair value hedges - Loans - Loans - Government bonds - Government bonds - Government bonds - Other securities - Other securities - Loans - Loans - Government bonds - Government bonds - Other securities Fair value hedges total Interest rate risk Interest rate risk Interest rate risk Interest rate risk Interest rate risk Interest rate risk FX & IR risk FX risk FX risk FX risk Other risk 64,596 - 14,814 151,501 - 44,508 - 9,099 716,841 12,797 113,806 - 1,127,962 - 143,208 - - - - 25,563 - - - - 2,299 171,070 (5,033) - (4,601) (45,319) - (638) - 503 - - - - (55,089) - Loans Amounts due to banks and deposits from the National (34,149) Bank of Hungary and other banks - Securities at amortised cost Securities at fair value through other comprehensive income - - Financial assets at fair value through profit or loss Securities at fair value through other comprehensive - income 448 Liabilities from issued securities - Loans - Loans - Securities at amortised cost Securities at fair value through other comprehensive - income (218) Liabilities from issued securities (33,919) INTEGRATED ANNUAL REPORT 2022 327 OTP BANK IFRS REPORT (SEPARATE) NOTE 45: FAIR VALUE OF FINANCIAL INSTRUMENTS (in HUF mn) [continued] c) Hedge accounting [continued] Derivative financial instruments designated as hedge accounting as follows: Type of instrument Type of risk Fair value hedge Nominal amount of the hedging instrument Carrying amount of the hedging instrument for the year ended 31 December 2021 Before netting Assets Liabilities Netting After netting Assets Liabilities Line item in the statement of financial position where the hedging instrument is located Changes in fair value used for calculating hedge ineffectiveness for the year ended 31 December 2021 Interest rate swap Interest rate risk 409,595 23,976 (17,878) 12,131 11,845 (5,747) management Derivative assets (liabilities) held for risk Cross-currency swap FX & IR risk 8,175 - (2,249) Cross-currency swap FX risk 566,936 5,471 (3,076) Interest rate swap Other 8,261 1,431 - Cash flow hedge Derivative assets (liabilities) held for risk - (2,249) management Derivative assets (liabilities) held for risk 5,471 (3,076) management Derivative assets (liabilities) held for risk 1,431 - management - - - Derivative assets (liabilities) held for risk Interest rate swap Interest rate risk 35,846 - (8,638) 1,020 (1,020) (7,618) management 6,494 4 (1,687) 3 - (101) 31 December 2021 Type of risk Carrying amount of the hedged item Accumulated amount of fair value hedge adjustments on the hedged item included in the carrying amount of the hedged item Assets Liabilities Assets Liabilities Line item in the statement of financial position in which the hedged item is included Fair value hedges - Loans - Loans Interest rate risk 57,176 - Interest rate risk - 142,649 - Government bonds Interest rate risk 13,921 - Government bonds Interest rate risk 152,830 - Government bonds Interest rate risk - Other securities Interest rate risk - Loans - Loans - Loans - Loans FX & IR risk FX risk FX risk FX risk - 42,008 10,595 458,312 12,811 98,668 - - - - - - - - - Other securities Other risk - 8,261 637 - (1,230) (22,457) - 318 611 - - - - - (16,858) Loans Loans - - - - - - - - Securities at amortised cost Securities at fair value through other comprehensive income Financial assets at fair value through profit or loss Securities at fair value through other comprehensive income Loans Loans Securities at fair value through other comprehensive income Securities at amortised cost (161) Liabilities from issued securities Fair value hedges total 846,321 150,910 (22,121) (17,019) INTEGRATED ANNUAL REPORT 2022 328 OTP BANK IFRS REPORT (SEPARATE) NOTE 45: FAIR VALUE OF FINANCIAL INSTRUMENTS (in HUF mn) [continued] c) Hedge accounting [continued] For the year ended 31 December 2022 OCI related to cash flow hedges as follows: Type of risk Interest rate risk Carrying amount of the hedged item Assets 32,024 Liabilities - Cash flow hedge reserve Line item in the statement of financial position in which the hedged item is included 9,210 Loans at amortised cost For the year ended 31 December 2021 OCI related to cash flow hedges as follows: Type of risk Interest rate risk Carrying amount of the hedged item Assets 35,965 Liabilities - Cash flow hedge reserve Line item in the statement of financial position in which the hedged item is included 3,568 Loans at amortised cost For the year ended 31 December 2022 change in basis swap spread recognised in OCI related to fair value hedges as follows: Type of risk FX risk FX risk Carrying amount of the hedged item Assets 716,841 12,797 729,638 Liabilities - - - Items recognised in other comprehensive income Change in the items recognized in other comprehensive income Line item in the statement of financial position in which the hedged item is included (363) (52) (415) 605 Loans at amortised cost - FVOCI securities 605 For the year ended 31 December 2021 change in basis swap spread recognised in OCI related to fair value hedges as follows: Type of risk FX risk FX risk Carrying amount of the hedged item Assets 458,312 12,811 471,123 Liabilities - - - Items recognised in other comprehensive income Change in the items recognized in other comprehensive income Line item in the statement of financial position in which the hedged item is included (1,032) 64 (968) (1,681) Loans at amortised cost - FVOCI securities (1,681) Change in the fair value of the hedging instrument related to cash flow hedge 31 December 2022 Type of instrument Type of risk Change in the value of the hedging instrument recognised in cash flow hedge reserve Hedge ineffectiveness recognised in profit or loss Line item in profit or loss that includes hedge ineffectiveness Interest rate swap Interest rate risk 5,642 Interest Income from Placements with (101) other banks, net of allowance for placement losses For the year ended 31 Deember 2022 an amount HUF 227 million reclassified from cash flow hedge reserve to profit or loss due to termination of hedging relationship. 31 December 2021 Type of instrument Type of risk Change in the value of the hedging instrument recognised in cash flow hedge reserve Hedge ineffectiveness recognised in profit or loss Line item in profit or loss that includes hedge ineffectiveness Interest rate swap Interest rate risk 6,307 Interest Income from Placements with other banks, net of allowance for placement losses (101) For the year ended 31 December 2021 an amount HUF 171 million reclassified from cash flow hedge reserve to profit or loss due to termination of hedging relationship. INTEGRATED ANNUAL REPORT 2022 329 OTP BANK IFRS REPORT (SEPARATE) NOTE 45: FAIR VALUE OF FINANCIAL INSTRUMENTS (in HUF mn) [continued] d) Fair value classes Methods and significant assumptions used to determine fair value of the different classes of financial instruments: Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities; Level 2: inputs other than quoted prices included within Level 1 that are observable for the asset or liability either directly or indirectly, Fair value measurements – in relation with instruments measured not at fair value – are categorized in level 2; Level 3: inputs for the asset or liability that are not based on observable market data (unobservable inputs). The following table shows an analysis of financial instruments recorded at fair value by level of the fair value hierarchy: 31 December 2022 Total Level 1 Level 2 Level 3 Loans mandatorily at fair value through profit or loss Financial assets at fair value through profit or loss from this: securities held for trading from this: positive FVA of derivative financial instruments designated as held for trading from this: securities mandatorily measured at fair value through profit or loss Equity instruments at fair value through other comprehensive income Securities at fair value through other comprehensive income Positive fair value of derivative financial instruments designated as hedge accounting Financial assets measured at fair value total Financial liabilities at fair value through profit or loss Negative fair value of derivative financial instruments classified as held for trading Short position Negative fair value of derivative financial instruments designated as hedge accounting Financial liabilities measured at fair value total 793,242 410,012 74,795 304,719 30,498 17,922 - 41,534 20,197 - 359,104 54,598 213 304,506 21,124 17,922 - - 793,242 9,374 - - 9,374 - 779,253 194,756 557,082 27,415 47,220 2,029,727 - 236,290 47,220 963,406 - 830,031 16,576 373,401 24,596 50,623 465,196 - - 16,576 1,886 24,596 - 26,482 370,865 - 50,623 421,488 650 - - 17,226 INTEGRATED ANNUAL REPORT 2022 330 OTP BANK IFRS REPORT (SEPARATE) NOTE 45: FAIR VALUE OF FINANCIAL INSTRUMENTS (in HUF mn) [continued] d) Fair value classes [continued] As at 31 December 2021 Total Level 1 Level 2 Level 3 Loans mandatorily at fair value through profit or loss Financial assets at fair value through profit or loss from this: securities held for trading from this: positive FVA of derivative financial instruments designated as held for trading from this: securities mandatorily measured at fair value through profit or loss Equity instruments at fair value through other comprehensive income Securities at fair value through other comprehensive income Positive fair value of derivative financial instruments designated as hedge accounting Financial assets measured at fair value total Financial liabilities at fair value through profit or loss Negative fair value of derivative financial instruments classified as held for trading Short position Negative fair value of derivative financial instruments designated as hedge accounting Financial liabilities measured at fair value total 662,012 246,462 35,633 182,768 28,061 17,138 - 37,537 18,566 - 189,501 17,067 662,012 19,424 - 164 172,434 10,170 18,807 17,138 - - 9,254 - - 624,801 298,009 326,792 17,727 1,551,002 - 335,546 17,727 534,020 - 681,436 20,133 192,261 16,904 18,690 247,988 - - 20,133 278 16,904 - 17,182 191,983 - 18,690 210,673 - - - 20,133 The fair value of investment properties is presented in Note 14 and they are categorized in level 3. The fair value of investment in subsidiaries is presented in Note 12 and they are categorized in level 3. Valuation techniques and sensitivity analysis on Level 2 instruments The fair value of Level 2 instruments is calculated by discounting their expected interest and capital cash flows. Discounting is done with the respective swap curve of each currency. Valuation techniques and sensitivity analysis on Level 3 instruments Sensitivity analysis is performed on products with significant unobservable inputs (Level 3) to generate a range of reasonably possible alternative valuations. The sensitivity methodologies applied take account of the nature of the valuation techniques used, as well as the availability and reliability of observable proxy and historical date and the impact of using alternative models. The calculation is based on range or spread data of reliable reference source or a scenario based on relevant market analysis alongside the impact of using alternative models. Sensitivities are calculated without reflecting the impact of any diversification in the portfolio. INTEGRATED ANNUAL REPORT 2022 331 OTP BANK IFRS REPORT (SEPARATE) NOTE 45: FAIR VALUE OF FINANCIAL INSTRUMENTS (in HUF mn) [continued] d) Fair value classes [continued] Unobservable inputs used in measuring fair value Class of financial instrument Financial assets at fair value through profit or loss Loans mandatorily at fair value through profit or loss Loans mandatorily at fair value through profit or loss Loans mandatorily at fair value through profit or loss Loans mandatorily at fair value through profit or loss Securities at fair value through other comprehensive income Type of financial instrument VISA C shares MFB refinancing loans Subsidised personal loans Subsidised personal loans Subsidised personal loans FVOCI debt securities Valuation technique Significant unobservable input Range of estimates for unobservable input Market approach combined with expert judgement Discount applied due to illiquidity and litigation +/-12% Discounted cash flow model Discounted cash flow model Discounted cash flow model Discounted cash flow model Market approach combined with expert judgement Probability of default +/- 20% Probability of default +/- 20% Operational costs +/- 20% Demography Change in the cash flow estimation +/- 5% Credit risk +/-15% The effect of unobservable inputs on fair value measurement Although the Bank believes that its estimates of fair value are appropriate, the use of different methodologies or assumptions could lead to different measurements of fair value. For fair value measurements in Level 3 changing the assumptions used to reasonably possible alternative assumptions would have the following effects. 31 December 2022 VISA C shares MFB refinancing loans Subsidised personal loans Unobservable inputs Illiquidity Probability of default Probability of default Subsidised personal loans Operational costs Subsidised personal loans FVOCI debt securities Demography Credit risk 31 December 2021 VISA C shares MFB refinancing loans Subsidised personal loans Unobservable inputs Illiquidity Probability of default Probability of default Subsidised personal loans Operational costs Subsidised personal loans Demography 772,094 772,094 772,094 27,415 Carrying amount 2,934 19,095 635,416 635,416 635,416 Carrying amount 1,469 Fair values Favourable Unfavourable 1,231 1,707 15,483 15,602 15,364 773,281 777,898 774,528 34,586 770,911 769,012 769,544 20,244 Effect on profit and loss Favourable 238 119 1,187 5,804 2,434 7,171 Unfavourable (238) (119) (1,183) (3,082) (2,550) (7,171) Fair values Effect on profit and loss Favourable Unfavourable Favourable Unfavourable (405) (123) 3,339 19,218 2,529 18,972 405 123 639,006 631,855 3,590 (3,561) 647,291 635,484 623,933 635,387 11,875 68 (11,483) (29) The favourable and unfavourable effects of using reasonably possible alternative assumptions for the valuation of Visa C shares have been calculated by modifying the discount rate used for the valuation by +/-12% as being the best estimates of the management as at 31 December 2022 and 31 December 2021 respectively. In the case of MFB refinancing loans and subsidised personal loans the Bank calculated the favourable and unfavourable effects of using reasonably possible alternative assumptions by modifying the rates of probability of default by +/- 20% as one of the most significant unobservable input. In case of subsidised personal loans operational cost and factors related to demography are considered as unobservable inputs to the applied fair value calculation model in addition to credit risk. INTEGRATED ANNUAL REPORT 2022 332 OTP BANK IFRS REPORT (SEPARATE) NOTE 45: FAIR VALUE OF FINANCIAL INSTRUMENTS (in HUF mn) [continued] d) Fair value classes [continued] The effect of unobservable inputs on fair value measurement [continued] The Bank calculated the favourable and unfavourable effects of using reasonably possible alternative assumptions by modifying the rates of operational costs by +/- 20% as one of the most significant unobservable input. In case of subsidised personal loans cash flow estimation are based on assumption related to the future number of childbirths performed by the debtors both in the current and the comparative period. According to the assumptions used in comparative period 15% of the debtors will not fulfill the conditions of the subsidy determined by the government after 5 years (“breach of conditions”), thereby debtors will be obliged to pay back advanced interest subsidy given in advance. Furthermore, in this case subsidised loans are converted to loans provided based on market conditions. Loans are prepaid by the government as part of the subsidy after the second and the third childbirth following the signatory of the loan contract. The Bank calculated the favourable and unfavourable effects of using reasonably possible alternative assumptions by modifying the demographical assumption of breach of conditions by +/- 5% as one of the most significant unobservable input in the cash flow estimation. For the year ended 31 December 2022 the Bank used a new and more complex model for cash flow calculations of the subsidised personal loans. The new model uses more scenarios compared to the previous one. These scenarios based on the above mentioned events (first second and third child births after signatory and breach of conditions) and also the event of divorce. The model uses public statistical information to estimate the outcome of these possible future events. The Bank calculated the favourable and unfavourable effects of using reasonably possible alternative assumptions by modiying the demographical assumption of future child births by +/-5% as one of the most significant unobservable input in the cash flow estimation. The favourable and unfavourable effects of using reasonably possible alternative assumptions for the valuation of FVOCI debt securities have been calculated by modifying the credit risk rate used for the valuation by +/-15% as being the best estimates of the management as at 31 December 2022 and 31 December 2021 respectively. INTEGRATED ANNUAL REPORT 2022 333 OTP BANK IFRS REPORT (SEPARATE) NOTE 45: FAIR VALUE OF FINANCIAL INSTRUMENTS (in HUF mn) [continued] d) Fair value classes [continued] The effect of unobservable inputs on fair value measurement [continued] Reconciliation of the opening and closing balances of Level 3 instruments for the year ended 31 December 2022 Opening balance Transfer to Level 3 Change in FVA due to credit risk Change in FVA due to market factors Purchases/ Disbursement Settlement/Sales Closing balance Loans mandatorily measured at fair value through profit or loss Securities mandatorily measured at fair value through profit or loss Derivative financial instruments designated as held for trading Securities at fair value through other comprehensive income Financial liabilities at fair value through profit or loss Total 662,012 9,254 10,170 - - - - 12,105 - - - (20,133) 661,303 12,105 - 11,872 11,872 (23,330) 182,259 (39,571) 793,242 (1,052) (10,820) 15,310 1,934 (17,958) 1,172 - - - - - - 183,431 1,623 (37,948) 9,374 (650) 27,415 (16,576) 812,805 Reconciliation of the opening and closing balances of Level 3 instruments for the year ended 31 December 2021 Loans mandatorily measured at fair value through profit or loss Securities mandatorily measured at fair value through profit or loss Derivative financial instruments designated as held for trading Financial liabilities at fair value through profit or loss Total Opening balance Issuance/ Disbursement Change in FVA due to credit risk Change in FVA due to market factors Settlement Closing balance 480,937 227,324 (16,255) (12,692) (17,302) 662,012 8,124 6,586 (25,902) 469,745 390 - - 227,714 - - - (16,255) 740 3,584 (3,916) (12,284) - - 9,685 (7,617) INTEGRATED ANNUAL REPORT 2022 9,254 10,170 (20,133) 661,303 334 OTP BANK IFRS REPORT (SEPARATE) NOTE 46: SIGNIFICANT EVENTS DURING THE YEAR ENDED 31 DECEMBER 2022 1) Capital increase in OTP Bank Romania See details about the event in Note 12. 2) Joint venture company in China On 2 June 2022 OTP Bank Plc. executed transaction agreements with its partners to establish a consumer finance joint venture company as a greenfield investment in China, with a 15% shareholding. 3) Special taxes on financial institutions Pursuant to Government Decree No. 197/2022 published on 4 June 2022, the Hungarian Government decided to impose a windfall tax on credit institutions and financial enterprises temporarily, that is for 2022 and 2023. As for 2022, the base of the windfall tax is the net revenues based on the 2021 financial statements, calculated according to local tax law, whereas the tax rate is 10%. The after-tax effect of the special tax on financial institutions payable in Hungary since 2010 reached HUF 20.2 billion for full-year 2022, the whole amount was booked in the first quarter. Furthermore, for 2022 the after-tax burden of the windfall tax was HUF 67.9 billion, accounted for in a lump sum in the second quarter. Thirdly, the newly introduced special tax on certain companies in Croatia was booked in the fourth quarter of 2022 with an after-tax effect of HUF (3.2) billion. 4) Maturity of OTP MOL Swap The amended final maturity of the share swap agreement concluded with MOL Plc. (“MOL”) on 16 April 2009 – whereby OTP has exchanged 24.000.000 OTP ordinary shares for 5.010.501 (from 28 September 2017 for 40.084.008) „A” series MOL ordinary shares – is 11 July 2027, until which each party can initiate cash or physical settlement of the transaction. 5) Prolongation of deadline of loan moratorium and interest rate cap See Note 4. 6) Interest benchmark reform During the IBOR reform the Bank identified several risks at the beginning of 2021, which the project had to manage and monitor closely. These risks include but are not limited to the following: ▪ The abolution of LIBOR affected several transactions that may require automated IT solutions, ▪ The new reference rates are different in nature from LIBOR that cause difficulties to settle the value ▪ differences with the customers, It was necessary to implement new processes not to develop LIBOR based products, and to develop a strategy for removing or modifying the affected products handled by the Bank, ▪ After termination of LIBOR, the Bank has to act under the "Fallback clauses", the clauses that regulate the replacement of the reference interest rates in the contract and the use of an alternative interest as a reference. The content of these clauses needs to be clearly defined and checked from a business point of view, ie which reference interest rate will be applied instead of LIBOR for the given contract and whether it is commercially appropriate. In defining the fallback clauses, efforts had to be made to provide a viable alternative to the termination of LIBOR that would not result in a business loss for the Bank. ▪ Legal risks related to the termination of LIBOR. Such risks can arise when Fallback clauses are not included in the contracts, or the law governing the contract doesn’t contain a statutory reference rate. In these cases the contracts can be cancelled due to impossibility or the termination by either party. ▪ Missing of contractual interest rates can result in settlement disputes, compensation cases or litigation. ▪ Business risks of the termination of LIBOR. The most significant of these are o the law governing the contract can set the applicable interest rate that can be result in a business loss for the Bank, o business loss due to negative customer experience, o operational risk, when several unique contracts must be handled in a short time INTEGRATED ANNUAL REPORT 2022 335 OTP BANK IFRS REPORT (SEPARATE) NOTE 46: SIGNIFICANT EVENTS DURING THE YEAR ENDED 31 DECEMBER 2022 [continued] 6) Interest benchmark reform [continued] Terminating interest rates () LIBOR USD* (1 week and 2 months settings), FedFund Rate LIBOR GBP LIBOR JPY LIBOR EUR LIBOR CHF** EONIA * The following USD LIBOR settings will be terminated after June 30, 2023: overnight and 1, 3, 6 and 12 Months. The affected USD LIBOR contracts will be handled on an ongoing basis until the remaining USD LIBOR settings’ cessation date. **In the case of CHF LIBOR, OTP Bank acts in accordance with the implementing regulation of the European Commission (https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=PI_COM:C(2021)7488&from=EN). Alternative Reference Rates SOFR SONIA TONA EURIBOR SARON €STR Amounts effected by IBOR reform as at 31 December 2022 Reference rate Type of the contract Nominal value of the contract Pieces of contracts USD LIBOR USD LIBOR USD LIBOR Other LIBOR Other LIBOR Total Loan Deposit Derivatives Derivatives Bonds (assets) 19,823 18,811 451,042 25,593 5,319 520,588 8 19 113 4 1 145 The above LIBOR-based amounts outstanding as at 31 December 2022 will be managed at the first interest period therefore they do not cause a risk to the Bank or to the customers. 7) Green Senior Preferred Notes issued in amount of EUR 400 million See details about the event in Note 20. 8) Financial closing of the bank acquisition transaction in Albania See details about the events in Note 12. 9) Green Senior Preferred Notes issued in amount of USD 60 million See details about the event in Note 20. 10) Capital increases at OTP Mortgage Bank Ltd. See details about the events in Note 12. 11) Green Senior Preferred Notes issued in amount of EUR 650 million See details about the event in Note 20. 12) Acquisition of Uzbek Ipoteka Banka See details about the event in Note 12. INTEGRATED ANNUAL REPORT 2022 336 OTP BANK IFRS REPORT (SEPARATE) NOTE 46: SIGNIFICANT EVENTS DURING THE YEAR ENDED 31 DECEMBER 2022 [continued] 13) Risk relating to the Russian-Ukrainian armed conflict On 24 February 2022 Russia launched a military operation against Ukraine which is still ongoing at the date of this Report. Until now many countries, as well as the European Union imposed sanctions due to the armed conflict on Russia and Russian businesses and citizens. Russia responded to these sanctions with similar measures. The armed conflict and the international sanctions influence the business and economic activities significantly all around the world. There are a number of factors associated with the Russian-Ukrainian armed conflict and the international sanctions as well as their impact on global economies that could have a material adverse effect on (among other things) the profitability, capital and liquidity of financial institutions such as the OTP Group. The armed conflict and the international sanctions cause significant economic damage to the affected parties and in addition they cause disruptions in the global economic processes, of which the precise consequences (inter alia the effects on energy and grain markets, the global transport routes and international trade as well as tourism) are difficult to be estimated at the moment. It remains unclear how this will evolve through 2022 and the OTP Group continues to monitor the situation closely. However, the OTP Group's ability to conduct business may be adversely affected by disruptions to its infrastructure, business processes and technology services. This may cause significant customer detriment, costs to reimburse losses incurred by the OTP Group’s customers, and reputational damage. Furthermore, the OTP Group relies on models to support a broad range of business and risk management activities, including informing business decisions and strategies, measuring and limiting risk, valuing exposures, conducting stress testing and assessing capital adequacy. Models are, by their nature, imperfect and incomplete representations of reality because they rely on assumptions and inputs, and as such assumptions may later potentially prove to be incorrect, this can affect the accuracy of their outputs. This may be exacerbated when dealing with unprecedented scenarios, such as the Russian-Ukrainian armed conflict and the international sanctions, due to the lack of reliable historical reference points and data. Any and all such events mentioned above could have a material adverse effect on the OTP Group’s business, financial condition, results of operations, prospects, liquidity, capital position and credit ratings, as well as on the OTP Group’s customers, employees and suppliers. INTEGRATED ANNUAL REPORT 2022 337 OTP BANK IFRS REPORT (SEPARATE) NOTE 47: SIGNIFICANT EVENTS AFTER THE REPORTING PERIOD 1) Summary of economic policy measures made and other relevant regulatory changes as post-balance sheet events In the section below, the measures and developments which have been made since the balance sheet date, and – in OTP Bank’s view – are relevant and have materially influenced / can materially influence the operation of the Bank. OTP Bank excludes any liability for the completeness and accuracy of the measures presented herein. Hungary • On 4 January 2023 OTP Bank announced that the National Bank of Hungary imposed the below additional capital requirements for OTP Group, on consolidated level, effective from 1 January 2023 until the next review: o o o 1.13%-points in case of the Common Equity Tier1 (CET1) capital, accordingly the minimum requirement for the consolidated CET1 ratio is 5.63% (without regulatory capital buffers); 1.50%-points in case of the Tier1 capital, accordingly the minimum requirement for the consolidated Tier1 ratio is 7.50% (without regulatory capital buffers); 2.00%-points in case of the Total SREP Capital Requirement (TSCR), accordingly the minimum requirement for the consolidated capital adequacy ratio is 10.00% (without regulatory capital buffers). • On 23 January 2023 the Ministry of Economic Development announced that the Gábor Baross Reindustrialization Loan Programme will be launched from February by Eximbank, with a total available amount of HUF 700 billion. Under the scheme, the HUF and EUR denominated loans will be available for all purposes, depending on the loan amount either through commercial banks or directly through Eximbank, but all the funding need will be provided or refinanced by Eximbank. The interest rate of the loans will be fixed throughout the whole tenor and will be typically maximum 6% in the case of HUF loans and maximum 3.5% in the case of EUR loans. • On 24 January 2023 the National Bank of Hungary kept the reference rates unchanged. The NBH held a long-term deposit tender on 25 January, and from 1 February discount bill auctions are held on a weekly basis. The NBH said that it will continue to meet foreign currency liquidity needs in the coming months to reach market balance related to the energy account. Furthermore, the Deputy Governor announced that effective from April the mandatory reserve requirement for banks will be increased from 5% to 10%. • On 27 January 2023 S&P Global Ratings lowered the long- and short-term foreign and local currency sovereign credit ratings on Hungary to 'BBB-/A-3' from 'BBB/A-2'. The outlook on the long-term ratings is stable. • According to the press release published on 30 January 2023 by S&P Global Ratings, the rating agency downgraded its long- and short-term issuer credit ratings, as well as the long- and short-term resolution counterparty ratings on OTP Bank Plc. and OTP Mortgage Bank Ltd. to 'BBB-/A-3' from 'BBB/A-2', and the senior preferred debt rating of OTP Bank Plc. was also downgraded by one notch to 'BBB-'. The outlook on the long-term issuer ratings is stable. • The financial completion of the transaction to purchase 100% shareholding of Nova KBM d.d. and its subsidiary in Slovenia – after obtaining all necessary regulatory approvals – has been completed on 6 February 2023. • According to the press release published on 6 February 2023 by Moody’s Investors Service, the rating agency concluded the ratings review initiated in July 2021. The rating agency downgraded OTP Bank’s subordinated bond rating by one notch to 'Ba2' from 'Ba1'. All other ratings and assessments of OTP Bank have been affirmed. Outlook is stable. • At the same time, Moody’s Investors Service downgraded the backed long-term domestic currency issuer rating of OTP Mortgage Bank to 'Baa3' from 'Baa2'. All other ratings and assessments of OTP Mortgage Bank have been affirmed. Outlook is stable. • On 15 February 2023 as value date OTP Bank issued Tier 2 Notes in the aggregate nominal amount of USD 650 million. The Tier 2 Notes with 10.25 years maturity, redeemable at par any time during the 3 -month period prior to the Reset Date at 5.25 years, were priced on 8 February 2023. INTEGRATED ANNUAL REPORT 2022 338 CONSOLIDATED FINANCIAL STATEMENTS IN ACCORDANCE WITH IFRS (2022) INTEGRATED ANNUAL REPORT 2022 339 OTP BANK IFRS REPORT (CONSOLIDATED) OTP BANK PLC CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 2022 (in HUF mn) Note 2022 2021 Cash, amounts due from banks and balances with the National Banks Placements with other banks Repo receivables Financial assets at fair value through profit or loss Securities at fair value through other comprehensive income Securities at amortized cost Loans at amortized cost Loans mandatorily at fair value through profit or loss Finance lease receivables Associates and other investments Property and equipment Intangible assets and goodwill Right-of-use assets Investment properties Derivative financial assets designated as hedge accounting Deferred tax assets Current income tax receivables Other assets Assets classified as held for sale TOTAL ASSETS Amounts due to banks, the National Governments, deposits from the National Banks and other banks Repo liabilities Financial liabilities designated at fair value through profit or loss Deposits from customers Liabilities from issued securities Derivative financial liabilities held for trading Derivative financial liabilities designated as hedge accounting Leasing liabilities Deferred tax liabilities Current income tax payable Provisions Other liabilities Subordinated bonds and loans TOTAL LIABILITIES Share capital Retained earnings and reserves Treasury shares Total equity attributable to the parent Total equity attributable to non-controlling interest TOTAL SHAREHOLDERS' EQUITY TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY Budapest, 31 March, 2023 5. 6. 7. 8. 9. 10. 11. 11. 36. 12. 13. 13. 36. 14. 15. 35. 35. 16. 50. 17. 18. 19. 20. 21. 22. 23. 36. 35. 35. 24. 24. 25. 26. 27. 28. 29. 4,221,392 1,351,082 41,009 436,387 1,739,603 4,891,938 16,094,458 1,247,414 1,298,752 73,849 464,469 237,031 58,937 47,452 48,247 75,421 5,650 471,119 - 32,804,210 1,463,158 217,369 54,191 25,188,805 870,682 385,747 27,949 63,778 40,094 28,866 131,621 707,654 301,984 29,481,898 28,000 3,395,215 (106,862) 3,316,353 5,959 3,322,312 32,804,210 2,556,035 1,584,861 61,052 341,397 2,224,510 3,891,335 13,493,183 1,068,111 1,182,628 67,222 411,136 248,631 50,726 29,882 18,757 15,109 29,978 276,785 2,046 27,553,384 1,567,348 79,047 41,184 21,068,644 436,325 202,716 11,228 53,286 24,045 36,581 119,799 598,081 278,334 24,516,618 28,000 3,109,509 (106,941) 3,030,568 6,198 3,036,766 27,553,384 Dr. Sándor Csányi Chairman and Chief Executive Officer László Wolf Deputy Chief Executive Officer INTEGRATED ANNUAL REPORT 2022 340 OTP BANK IFRS REPORT (CONSOLIDATED) OTP BANK PLC CONSOLIDATED STATEMENT OF PROFIT OR LOSS FOR THE YEAR ENDED 31 DECEMBER 2022 (in HUF mn) Note 2022 2021 CONTINUING OPERATIONS Interest income calculated using the effective interest method Income similar to interest income Interest income and income similar to interest income Interest expense NET INTEREST INCOME Loss allowance on loans, placements, amounts due from banks and on repo receivables Change in the fair value attributable to changes in the credit risk of loans mandatorily measured at fair value through profit of loss Loss allowance on securities at fair value through other comprehensive income and on securities at amortized cost Provision for commitments and guarantees given (Impairment) / Release of impairment of assets subject to operating lease and of investment properties Risk cost total NET INTEREST INCOME AFTER RISK COST (Loss) / Gain from derecognition of financial assets at amortized cost Modification loss Income from fees and commissions Expense from fees and commissions Net profit from fees and commissions Foreign exchange result, net (Loss) / Gain on securities, net Fair value adjustment on financial instruments measured at fair value through profit or loss Net results on derivative instruments and hedge relationships Profit from associates Goodwill impairment Other operating income Other operating expenses Net operating income Personnel expenses Depreciation and amortization Other general expenses Other administrative expenses PROFIT BEFORE INCOME TAX Income tax expense PROFIT AFTER INCOME TAX FOR THE PERIOD FROM CONTINUING OPERATIONS 30. 30. 31. 31. 31. 31. 31. 31. 4. 32. 32. 33. 33. 33. 33. 8., 9. 13. 34. 34. 34. 13. 34. 35. 1,508,050 495,973 2,004,023 (912,709) 1,091,314 922,539 194,920 1,117,459 (243,149) 874,310 (155,681) (27,721) 13,346 (16,289) (60,774) (6,145) (1,204) (210,458) 880,856 (1,655) (39,997) 739,576 (139,216) 600,360 (14,989) (4,488) (4,164) 10,558 14,640 (67,715) 125,415 (128,785) (69,528) (402,563) (107,588) (464,997) (975,148) 394,888 (59,251) (3,974) (99) 438 (47,645) 826,665 1,885 (13,672) 554,113 (111,939) 442,174 (4,075) 5,560 (532) 6,798 15,648 - 81,328 (85,732) 18,995 (340,684) (94,996) (311,932) (747,612) 528,435 (72,123) 335,637 456,312 INTEGRATED ANNUAL REPORT 2022 341 OTP BANK IFRS REPORT (CONSOLIDATED) OTP BANK PLC CONSOLIDATED STATEMENT OF PROFIT OR LOSS FOR THE YEAR ENDED 31 DECEMBER 2022 [continued] (in HUF mn) PROFIT AFTER INCOME TAX FOR THE PERIOD FROM CONTINUING OPERATIONS From this, attributable to: Non-controlling interest Owners of the company DISCONTINUED OPERATIONS Gain from disposal of subsidiary classified as held for sale Gain from discontinued operations PROFIT AFTER INCOME TAX FROM CONTINUING AND DISCOUNTINUED OPERATION From this, attributable to: Non-controlling interest Owners of the company Earnings per share (in HUF) From continuing operations Basic Diluted From continuing and discontinued operations Basic Diluted Note 2022 2021 335,637 456,312 727 334,910 11,444 - 836 455,476 - 116 347,081 456,428 727 346,354 836 455,592 1,246 1,246 1,289 1,288 1,738 1,738 1,738 1,738 29. 50. 50. 29. 46. 46. 46. 46. INTEGRATED ANNUAL REPORT 2022 342 OTP BANK IFRS REPORT (CONSOLIDATED) OTP BANK PLC CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR ENDED 31 DECEMBER 2022 (in HUF mn) PROFIT AFTER INCOME TAX FOR THE YEAR Items that may be reclassified subsequently to profit or loss: Fair value adjustment of securities at fair value through other comprehensive income Deferred tax related to fair value adjustment of securities at fair value through other comprehensive income Foreign currency translation difference Items that will not be reclassified subsequently to profit or loss: Fair value changes of equity instruments at fair value through other comprehensive income Deferred tax related to equity instruments at fair value through other comprehensive income Change of actuarial gain related to employee benefits Deferred tax related to change of actuarial gain related to employee benefits Subtotal TOTAL COMPREHENSIVE INCOME From this, attributable to: Non-controlling interest Owners of the company Note 2022 2021 347,081 456,428 27. 27. 27. 27. 27. 27. 27. (134,692) (50,789) 10,816 179,623 3,526 61,729 5,780 2,747 (1,282) (361) 1,059 (43) 53 (11) 61,261 16,894 408,342 473,322 647 407,695 1,041 472,281 INTEGRATED ANNUAL REPORT 2022 343 OTP BANK IFRS REPORT (CONSOLIDATED) OTP BANK PLC CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 31 DECEMBER 2022 (in HUF mn) Note Share capital Capital reserve Retained earnings and other reserves1 Treasury shares Total attributable to shareholders Non-controlling interest Total Balance as at 1 January 2021 Profit after income tax for the period Other Comprehensive Income Total comprehensive income Increase due to business combination Share-based payment Adjustment of previous years' reserves Sale of Treasury shares Treasury shares - loss on sale Treasury shares - acquisition Payments to ICES holders Increase due to termination of ICES Balance as at 31 December 2021 28,000 - - - - - - - - - - - 28,000 40. 28. 28. 28. 27. 27. 52 - - - - - - - - - - - 52 2,629,024 455,592 16,689 472,281 - 3,589 1,034 - (27,800) - (3,734) 35,063 3,109,457 (124,080) - - - - - - 293,572 - (276,433) - - (106,941) 2,532,996 455,592 16,689 472,281 - 3,589 1,034 293,572 (27,800) (276,433) (3,734) 35,063 3,030,568 4,116 836 205 1,041 1,041 - - - - - - - 6,198 2,537,112 456,428 16,894 473,322 1,041 3,589 1,034 293,572 (27,800) (276,433) (3,734) 35,063 3,036,766 Note Share capital Capital reserve Retained earnings and other reserves1 Treasury shares Total attributable to shareholders Non-controlling interest Total Balance as at 1 January 2022 Profit after income tax for the period Other Comprehensive Income Total comprehensive income Purchasing of non-controlling interest Decrease due to business combination Share-based payment Paid dividends for years 2019, 2020, 2021 Adjustment related to share-based payment Sale of Treasury shares Treasury shares - loss on sale Treasury shares - acquisition Balance as at 31 December 2022 40. 27. 28. 28. 28. 1 See details in Note 27. 28,000 - - - - - - - - - - - 28,000 52 - - - - - - - - - - - 52 3,109,457 346,354 61,341 407,695 - (1,321) 2,948 (120,248) 4,066 - (7,434) - 3,395,163 (106,941) - - - - - - - - 16,347 - (16,268) (106,862) 3,030,568 346,354 61,341 407,695 - (1,321) 2,948 (120,248) 4,066 16,347 (7,434) (16,268) 3,316,353 6,198 727 (80) 647 (886) - - - - - - - 5,959 3,036,766 347,081 61,261 408,342 (886) (1,321) 2,948 (120,248) 4,066 16,347 (7,434) (16,268) 3,322,312 INTEGRATED ANNUAL REPORT 2022 344 OTP BANK IFRS REPORT (CONSOLIDATED) OTP BANK PLC CONSOLIDATED STATEMENT OF CASH-FLOWS FOR THE YEAR ENDED 31 DECEMBER 2022 (in HUF mn) OPERATING ACTIVITIES Profit after income tax for the period (attributable to the owners of the company) Net accrued interest Dividend income Depreciation and amortization Goodwill impairment Loss allowance on securities Loss allowance on loans and placements, amounts due from banks and on repo receivables Loss allowance on investments Loss allowance / (Release of loss allowance) on investment properties Impairment on tangible and intangible assets Loss allowance on other assets Provision on off-balance sheet commitments and contingent liabilities Share-based payment Unrealized (gains) / losses on fair value change of financial instrument at fair value through profit or loss Non-realized foreign exchange (gain) / loss (Gain) / Loss from sale of tangible and intangible assets Unrealized losses on fair value change of derivative financial instruments Negative goodwill Gain on discontinued operations Net changes in assets and liabilities in operating activities Net increase in securities at fair value through profit or loss Net increase in compulsory reserves at the National Banks Decrease / (Increase) in placement with other banks, before loss allowance for placements Net increase in loans at amortized cost before loss allowance for loans and in loans at fair value Net increase in other assets before loss allowance Net (decrease) / increase in amounts due to banks, the National Governments, deposits from the National Banks and other banks and repo liabilities Net increase in financial liabilities designated at fair value through profit or loss Net increase in deposits from customers Cash payments for the interest portion of the lease liability Net increase in other liabilities Income tax paid Net Cash Provided by Operating Activities Note 2022 2021 346,354 45,499 (13,800) 112,749 67,715 60,774 155,681 901 1,326 468 15,973 8,589 2,948 (84,641) (296,986) (1,281) 81,440 (3,784) - 455,592 14,854 (15,648) 100,321 - 3,974 27,721 6,640 (243) 2,772 1,986 10,856 3,589 11,404 22,258 129 18,982 - (116) (133,548) (126,364) (769,233) (96,936) 412,510 (307,731) (2,733,463) (2,206,183) (205,916) (17,930) 27. 13. 13. 9.,10. 5-7., 11. 12. 14. 13. 16. 24. 40. 33. 33. 13. 33. 42. 50. 8. 5. 6. 11. 16. 17., 18. (43,747) 299,138 19. 20. 36. 24. 35. 11,073 3,787,573 (2,386) 400,077 (74,411) 1,148,454 1,315 3,125,494 (935) 186,319 (47,876) 1,473,382 INTEGRATED ANNUAL REPORT 2022 345 OTP BANK IFRS REPORT (CONSOLIDATED) OTP BANK PLC CONSOLIDATED STATEMENT OF CASH-FLOWS FOR THE YEAR ENDED 31 DECEMBER 2022 (in HUF mn) [continued] Note 2022 2021 INVESTING ACTIVITIES Purchase of securities at fair value through other comprehensive income Proceeds from sale of securities at fair value through other comprehensive income Purchase of investments Proceeds from sale of investments Dividends received Purchase of securities at amortized cost Redemption of securities at amortized cost Purchase of property, equipment and intangible assets Proceeds from disposals of property, equipment and intangible assets Purchase of investment properties Proceeds from sale of investment properties Net change in cash and cash equivalents from discontinued operation Net cash paid for acquisition Net Cash Used in Investing Activities FINANCING ACTIVITIES Cash received from issuance of securities Cash used for redemption of issued securities Cash payments for the principal portion of the lease liability Cash received from issuance of subordinated bonds and loans Cash used for redemption of subordinated bonds and loans Payments to ICES holders Sale of Treasury shares Purchase of Treasury shares Dividends paid Net Cash Provided by Financing Activities TOTAL NET CASH PROVIDED BY / (USED IN) Cash and cash equivalents at the beginning of the period Foreign currency translation Net change in cash and cash equivalent Adjustment due to discontinued operation Cash and cash equivalents at the end of the period 9. 9. 12. 12. 27. 10. 10. 13. 13. 14. 14. 50. 42. 21. 21. 36. 25. 25. 27. 28. 28. 27. 5. (1,129,729) (2,342,772) 1,529,538 (38,053) 30,525 13,800 (32,573,247) 31,625,182 (275,017) 2,217,702 (32,626) 11,207 15,648 (6,249,137) 4,997,215 (300,715) 76,136 (20,935) 1,127 119,661 (134) 7,983 - 38,889 (721,784) 116 - (1,555,852) 569,839 (133,712) (24,632) 6,418 (4,646) - 8,913 (16,268) (116,147) 289,765 76,728 (106,350) (14,149) 2,676 - 71,688 293,572 (276,433) (10) 47,722 716,435 (34,748) 1,701,564 179,689 716,435 - 1,674,777 61,533 (34,748) 2 5. 2,597,688 1,701,564 INTEGRATED ANNUAL REPORT 2022 346 OTP BANK IFRS REPORT (CONSOLIDATED) NOTE 1: ORGANIZATION AND BASIS OF CONSOLIDATED FINANCIAL STATEMENTS 1.1. General information OTP Bank Plc (the “Bank” or “OTP Bank”) was established on 31 December 1990, when the previously State- owned company was transformed into a limited liability company. The Bank’s registered office address is 16, Nador Street, Budapest 1051, Hungary. Due to Hungarian legislation audit services are a statutory requirement for OTP Bank. Disclosure information about the auditor: Ernst & Young Audit Ltd. (001165), 1132 Budapest Váci Street 20. Registered under 01-09- 267553 by Budapest-Capital Regional Court, as registry court. Statutory registered auditor: Zsuzsanna Nagyváradiné Szépfalvi, registration number: 005313. These Consolidated Financial Statements were approved by the Board of Directors and authorised for issue on 31 March 2023. The Bank’s owners have the power to amend the Consolidated Financial Statements after issue if applicable. The Bank’s owners have the power to amend the Consolidated Financial Statements after issue if applicable. In 1995, the shares of the Bank were introduced on the Budapest and the Luxembourg Stock Exchanges and were also traded on the SEAQ board on the London Stock Exchange and on PORTAL in the USA. The structure of the Share capital by shareholders (%): Domestic and foreign private and institutional investors Employees Treasury shares Total 2022 2021 99% 1% - 100% 98% 1% 1% 100% The Bank’s Registered Capital consists of 280.000.010 pieces of ordinary shares with the nominal value of HUF 100 each, representing the same rights to the shareholders. The Bank and its subsidiaries (“Entities of the Group“, together the “Group” or “OTP Group”) provide a full range of commercial banking services through a wide network of 1,392 branches in the following countries Hungary, Bulgaria, Serbia, Croatia, Russia, Romania, Ukraine, Albania, Montenegro, Moldova and Slovenia, as well as provides other services in the Netherlands and Malta. The number of the active employees without long-term breaks, and with part-time employees taken into account proportionately, and the average number of active employees on monthly basis at the Group: The number of employees at the Group The average number of employees at the Group 2022 35,976 36,168 2021 37,866 37,890 INTEGRATED ANNUAL REPORT 2022 347 OTP BANK IFRS REPORT (CONSOLIDATED) NOTE 1: ORGANIZATION AND BASIS OF CONSOLIDATED FINANCIAL STATEMENTS [continued] 1.2. Basis of Accounting These Consolidated Financial Statements were prepared based on the assumptions of the Management that the Bank will remain in business for the foreseeable future and that the Bank will not be forced to halt operations and liquidate its assets in the near term at what may be very low fire-sale prices. The Entities of the Group maintain their accounting records and prepare their statutory accounts in accordance with the commercial, banking and fiscal regulations prevailing in Hungary and in case of foreign subsidiaries in accordance with the commercial, banking and fiscal regulations of the country in which they are domiciled. The Bank’s functional currency is the Hungarian Forint (“HUF”). It is also presentation currency for the Group. The financial statements of the subsidiaries used during the preparation of Consolidated Financial Statements of the Group have the same reporting period – starting from 1 January ending as at 31 December – like the reporting period of the Group. Due to the fact that the Bank is listed on international and national stock exchanges, the Bank is obliged to present its financial statements in accordance with International Financial Reporting Standards (“IFRS”) as adopted by the European Union (the “EU”). Certain adjustments have been made to the Entities’ statutory accounts in order to present the Consolidated Financial Statements of the Group in accordance with all standards and interpretations approved by the International Accounting Standards Board (“IASB”). These Consolidated Financial Statements have been prepared in accordance with IFRS as adopted by the EU. The accompanying Notes to these Consolidated Financial Statements form an integral part of these Consolidated Financial Statements prepared in accordance with International Financial Reporting Standards as adopted by EU. 1.2.1. The effect of adopting new and revised International Financial Reporting Standards effective from 1 January 2022 The following amendments to the existing standards and new interpretation issued by the International Accounting Standards Board (IASB) and adopted by the EU are effective for the current reporting period: • Amendments to IFRS 1 “First-time Adoption of International Financial Reporting Standards”, IFRS 9 “Financial Instruments”, IAS 41 “Agriculture”– “Annual Improvements to IFRSs 2018-2020 Cycle” - adopted by EU on 28 June 2021 (effective for annual periods beginning on or after 1 January 2022): o IFRS 1 First-time Adoption of International Financial Reporting Standards – Subsidiary as a first- time adopter: The amendment permits a subsidiary that elects to apply paragraph D16(a) of IFRS 1 to measure cumulative translation differences using the amounts reported in the parent’s consolidated financial statements, based on the parent’s date of transition to IFRS, if no adjustments were made for consolidation procedures and for the effects of the business combination in which the parent acquired the subsidiary. This amendment is also applied to an associate or joint venture that elects to apply paragraph D16(a) of IFRS 1. These amendments had no impact on the consolidated financial statements of the Group as it is not a first-time adopter. o IFRS 9 Financial Instruments – Fees in the ’10 per cent’ test for derecognition of financial liabilities: The amendment clarifies the fees that an entity includes when assessing whether the terms of a new or modified financial liability are substantially different from the terms of the original financial liability. These fees include only those paid or received between the borrower and the lender, including fees paid or received by either the borrower or lender on the other’s behalf. There is no similar amendment proposed for IAS 39 Financial Instruments: Recognition and Measurement. In accordance with the transitional provisions, the Group applies the amendment to financial liabilities that are modified or exchanged on or after the beginning of the annual reporting period in which the entity first applies the amendment (the date of initial application). These amendments had no impact on the consolidated financial statements of the Group as there were no fees charged or incurred related to modifications during the period. INTEGRATED ANNUAL REPORT 2022 348 OTP BANK NOTE 1: ORGANIZATION AND BASIS OF CONSOLIDATED FINANCIAL STATEMENTS [continued] IFRS REPORT (CONSOLIDATED) 1.2. Basis of Accounting [continued] 1.2.1. The effect of adopting new and revised International Financial Reporting Standards effective from 1 January 2022 [continued] o IAS 41 Agriculture – Taxation in fair value measurements: The amendment removes the requirement in paragraph 22 of IAS 41 that entities exclude cash flows for taxation when measuring the fair value of assets within the scope of IAS 41. These amendments had limited impact on the consolidated financial statements of the Group as it has limited assets in scope of IAS 41 as at the reporting date. • Amendments to IFRS 3 “Business Combinations”; IAS 16 “Property, Plant and Equipment”; IAS 37 “Provisions, Contingent Liabilities and Contingent Assets” - adopted by the EU on 28 June 2021 Annual Improvements (effective for annual periods beginning on or after 1 January 2022): o IFRS 3 Business Combinations (Amendments) update a reference in IFRS 3 to the previous version of the IASB’s Conceptual Framework for Financial Reporting to the current version issued in 2018 without significantly changing the accounting requirements for business combinations. o IAS 16 Property, Plant and Equipment (Amendments) prohibit a company from deducting from the cost of property, plant and equipment any proceeds from the sale of items produced while bringing the asset to the location and condition necessary for it be capable of operating in the manner intended by management. Instead, a company recognizes such sales proceeds and related cost in profit or loss. o IAS 37 Provisions, Contingent Liabilities and Contingent Assets (Amendments) specify which costs a company includes in determining the cost of fulfilling a contract for the purpose of assessing whether a contract is onerous. The amendments clarify, the costs that relate directly to a contract to provide goods or services include both incremental costs and an allocation of costs directly related to the contract activities. The adoption of these amendments to the existing standards has not led to any material changes in the Group’s Consolidated Financial Statements. 1.2.2. New and revised Standards and Interpretations issued by IASB and adopted by the EU but not yet effective At the date of authorization of these financial statements there are new standards, amendments to the existing standards or interpretations which are issued by IASB and adopted by the EU which are not yet effective: • Amendments to IAS 1 “Presentation of Financial Statements” and IFRS Practice Statement 2 – Disclosure of Accounting policies – adopted by the EU on 2 March 2022 (effective for annual periods beginning on or after 1 January 2023; earlier application permitted): o The amendments provide guidance on the application of materiality judgements to accounting policy disclosures. In particular, the amendments to IAS 1 replace the requirement to disclose ‘significant’ accounting policies with a requirement to disclose ‘material’ accounting policies. Also, guidance and illustrative examples are added in the Practice Statement to assist in the application of the materiality concept when making judgements about accounting policy disclosures. • Amendments to IAS 8 “Accounting policies, Changes in Accounting Estimates and Errors” – Definition of Accounting Estimates – adopted in the EU on 2 March 2022 (effective for annual periods beginning on or after 1 January 2023 with earlier application permitted and apply to changes in accounting policies and changes in accounting estimates that occur on or after the start of that period): o The amendments introduce a new definition of accounting estimates, defined as monetary amounts in financial statements that are subject to measurement uncertainty, if they do not result from a correction of prior period error. Also, the amendments clarify what changes in accounting estimates are and how these differ from changes in accounting policies and corrections of errors. INTEGRATED ANNUAL REPORT 2022 349 OTP BANK IFRS REPORT (CONSOLIDATED) NOTE 1: ORGANIZATION AND BASIS OF CONSOLIDATED FINANCIAL STATEMENTS [continued] 1.2. Basis of Accounting [continued] 1.2.2. New and revised Standards and Interpretations issued by IASB and adopted by the EU but not yet effective [continued] • Amendments to IFRS 17 “Insurance Contracts” – adopted by the EU on 19 November 2021 (effective for annual periods beginning on or after 1 January 2023). • Amendments to IFRS 17 “Insurance Contracts” – Initial application of IFRS 17 and IFRS 9 – Comparative Information – adopted by the EU on 8 September 2022 (effective date for annual periods beginning on or after 1 January 2023 with earlier application permitted, provided the entity also applies IFRS 9 Financial Instruments on or before the date it first applies IFRS 17). • Amendments to IAS 12 “Income Taxes” – Deferred Tax related to Assets and Liabilities arising from a Single Transaction – adopted by the EU on 11 August 2022 (effective for annual periods beginning on or after 1 January 2023; earlier application permitted): o The amendments narrow the scope of and provide further clarity on the initial recognition exception under IAS 12 and specify how companies should account for deferred tax related to assets and liabilities arising from a single transaction, such as leases and decommissioning obligations. The amendments clarify that where payments that settle a liability are deductible for tax purposes, it is a matter of judgement, having considered the applicable tax law, whether such deductions are attributable for tax purposes to the liability or to the related asset component. Under the amendments, the initial recognition exception does not apply to transactions that, on initial recognition, give rise to equal taxable and deductible temporary differences. It only applies if the recognition of a lease asset and lease liability (or decommissioning liability and decommissioning asset component) give rise to taxable and deductible temporary differences that are not equal. The Group does not adopt these new standards and amendments to existing standards before their effective date. The Group anticipates that the adoption of these new standards, amendments to the existing standards and new interpretations will have no material impact on the Consolidated Financial Statements of the Group in the period of initial application. 1.2.3. Standards and Interpretations issued by IASB, but not yet adopted by the EU At present, IFRS as adopted by the EU do not significantly differ from regulations adopted by the International Accounting Standards Board (IASB) except for the following new standards, amendments to the existing standards and new interpretation, which were not endorsed for use in EU as at the date of publication of these Consolidated Financial Statements: • Amendments to IAS 1 “Presentation of Financial Statements” - Classification of Liabilities as Current or Non-Current (effective for annual periods beginning on or after 1 January 2024; earlier application permitted): o The objective of the amendments is to clarify the principles in IAS 1 for the classification of liabilities as either current or non-current. The amendments clarify the meaning of a right to defer settlement, the requirement for this right to exist at the end of the reporting period, that management intent does not affect current or non-current classification, that options by the counterparty that could result in settlement by the transfer of the entity’s own equity instruments do not affect current or non-current classification. Also, the amendments specify that only covenants with which an entity must comply on or before the reporting date will affect a liability’s classification. Additional disclosures are also required for non-current liabilities arising from loan arrangements that are subject to covenants to be complied with within twelve months after the reporting period. INTEGRATED ANNUAL REPORT 2022 350 OTP BANK IFRS REPORT (CONSOLIDATED) NOTE 1: ORGANIZATION AND BASIS OF CONSOLIDATED FINANCIAL STATEMENTS [continued] 1.2. Basis of Accounting [continued] 1.2.3. Standards and Interpretations issued by IASB, but not yet adopted by the EU [continued] • Amendments to IFRS 16 “Leases” – Lease Liability in a Sale and Leaseback – issued by IASB on 22 September 2022 (effective for annual periods beginning on or after 1 January 2024; earlier application permitted): o The amendments are intended to improve the requirements that a seller-lessee uses in measuring the lease liability arising in a sale and leaseback transaction in IFRS 16, while it does not change the accounting for leases unrelated to sale and leaseback transactions. In particular, the seller-lessee determines ‘lease payments’ or ‘revised lease payments’ in such a way that the seller-lessee would not recognize any amount of the gain or loss that relates to the right of use it retains. Applying these requirements does not prevent the seller-lessee from recognizing, in profit or loss, any gain or loss relating to the partial or full termination of a lease. A seller-lessee applies the amendment retrospectively in accordance with IAS 8 to sale and leaseback transactions entered into after the date of initial application, being the beginning of the annual reporting period in which an entity first applied IFRS 16. • Amendments to IFRS 10 “Consolidated Financial Statements” and IAS 28 “Investments in Associates and Joint Ventures” – Sale or Contribution of Assets between an Investor and its Associate or Joint Venture and further amendments (effective date deferred indefinitely until the research project on the equity method has been concluded): o The amendments address an acknowledged inconsistency between the requirements in IFRS 10 and those in IAS 28, in dealing with the sale or contribution of assets between an investor and its associate or joint venture. The main consequence of the amendments is that a full gain or loss is recognized when a transaction involves a business (whether it is housed in a subsidiary or not). A partial gain or loss is recognized when a transaction involves assets that do not constitute a business, even if these assets are housed in a subsidiary. In December 2015 the IASB postponed the effective date of this amendment indefinitely pending the outcome of its research project on the equity method of accounting. The Group anticipates that the adoption of these new standards, amendments to the existing Standards and new interpretations will have no significant impact on the Consolidated Financial Statements of the Group in the period of initial application. INTEGRATED ANNUAL REPORT 2022 351 OTP BANK IFRS REPORT (CONSOLIDATED) NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Significant accounting policies applied in the preparation of the accompanying Consolidated Financial Statements are summarized below: 2.1. Basis of Presentation These Consolidated Financial Statements have been prepared under the historical cost convention with the exception of certain financial instruments, which are recorded at fair value. Revenues and expenses are recorded in the period in which they are earned or incurred. The Group does not offset assets and liabilities or income and expenses unless it is required or permitted by an IFRS standard. During the preparation of Consolidated Financial Statements assets and liabilities, income and expenses are presented separately, except in certain cases, when one of the IFRS standards prescribes net presenting related to certain items (see note 2.8. below). The presentation of Consolidated Financial Statements in conformity with IFRS as adopted by the EU requires the Management of the Group to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and their reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Future changes in economic conditions, business strategies, regulatory requirements, accounting rules and other factors could result in a change in estimates that could have a material impact on future financial statements. 2.2. Foreign currency translation In preparing the financial statements of each individual group entity, transactions in currencies other than the entity's functional currencies are translated into functional currencies at the rates of exchange prevailing at the dates of the transactions. At the end of each reporting period, monetary items denominated in foreign currencies are retranslated at the exchange rates quoted by the National Bank of Hungary (“NBH”), or if there is no official rate, at exchange rates quoted by OTP Bank as at the date of the Consolidated Financial Statements. Non-monetary items carried at fair value that are denominated in foreign currencies are retranslated at the rates prevailing at the date when the fair value was determined. Non-monetary items that are measured in terms of historical cost in a foreign currency are not retranslated. Exchange differences on monetary items are recognized in profit or loss in the period in which they arise except for: - exchange differences on foreign currency borrowings relating to assets under construction for future productive use, which are included in the cost of those assets when they are regarded as an adjustment to interest costs on those foreign currency borrowings; - exchange differences on transactions entered into in order to hedge certain foreign currency risks (see note 2.7. below for hedging accounting policies); and - exchange differences on monetary items receivable from or payable to a foreign operation for which settlement is neither planned nor likely to occur (therefore forming part of the net investment in the foreign operation), which are recognized initially in Other Comprehensive Income and reclassified from equity to profit or loss on repayment of the monetary items. For the purposes of presenting Consolidated Financial Statements, the assets and liabilities of the Group's foreign operations are translated into HUF using exchange rates prevailing at the end of each reporting period. Income and expense items are translated at the average exchange rates for the period, unless exchange rates fluctuate significantly during that period, in which case the exchange rates at the dates of the transactions are used. Exchange differences arising, if any, are recognized in Other Comprehensive Income and accumulated in equity (attributed to non-controlling interests as appropriate). INTEGRATED ANNUAL REPORT 2022 352 OTP BANK IFRS REPORT (CONSOLIDATED) NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES [continued] 2.2. Foreign currency translation [continued] On the disposal of a foreign operation (i.e. a disposal of the Group's entire interest in a foreign operation, or a disposal involving loss of control over a subsidiary that includes a foreign operation, a disposal involving loss of joint control over a jointly controlled entity that includes a foreign operation, or a disposal involving loss of significant influence over an associate that includes a foreign operation), all of the exchange differences accumulated in equity in respect of that operation attributable to the owners of the Group are reclassified to profit or loss. In addition, in relation to a partial disposal of a subsidiary that does not result in the Group losing control over the subsidiary, the proportionate share of accumulated exchange differences are re-attributed to non-controlling interests and are not recognized in profit or loss. Goodwill and fair value adjustments on identifiable assets and liabilities acquired arising on the acquisition of a foreign operation are treated as assets and liabilities of the foreign operation and translated at the rate of exchange prevailing at the end of each reporting period. Exchange differences arising are recognized in Other Comprehensive Income and accumulated in equity. 2.3. Principles of consolidation As the ultimate parent, OTP Bank is preparing Consolidated Financial Statements of the Group. These Consolidated Financial Statements combine the assets, liabilities, equity, income, expenses and cash flows of the Bank and of those subsidiaries of the Bank in which the Bank exercises control. All intra-group transactions are consolidated fully on a line-by-line basis while under equity method other consolidation rules are applied. Determination of the entities which are involved into the consolidation procedures based on the determination of the Group’s Control over another entity. Control exists when the Bank has power over the investee, is able to use this power and is exposed or has right to variable returns. Consolidation of a subsidiary should begin from the date when the Group obtains control and cease when the Group loses control. Therefore, income and expenses of a subsidiary should be included in the Consolidated Financial Statements from the date the Group gains control of the subsidiary until the date when the Group ceases to have control of the subsidiary. The list of the major fully consolidated subsidiaries, the percentage of issued capital owned by the Bank and the description of their activities is provided in Note 43. 2.4. Accounting for acquisitions Business combinations are accounted for using the acquisition method. Any goodwill arising on acquisition is recognized in the Consolidated Statement of Financial Position and accounted for as indicated below. The acquisition date is the date on which the acquirer effectively obtains control over the acquiree. Before this date, it should be presented as Advance for investments within Other assets. Goodwill, which represents the residual cost of the acquisition after obtaining the control over the acquiree in the fair value of the identifiable assets acquired and liabilities assumed is held as an intangible asset and recorded at cost less any accumulated impairment losses in the Consolidated Financial Statements. The Group tests goodwill for impairment by comparing its recoverable amount with its carrying amount, and recognising any excess of the carrying amount over the recoverable amount an impairment loss. The recoverable amount of goodwill is the higher of its fair value less costs of disposal and its value in use. If the Group loses control of a subsidiary, derecognizes the assets (including any goodwill) and liabilities of the subsidiary at their carrying amounts at the date when control is lost and recognizes any difference as a gain or loss on the sale attributable to the parent in the Consolidated Statement of Profit or Loss on Net income from discontinued operations. Goodwill acquired in a business combination is tested for impairment annually or more frequently if events or changes in circumstances indicate. The goodwill is allocated to the cash-generating units that are expected to benefit from the synergies of the combinations. INTEGRATED ANNUAL REPORT 2022 353 OTP BANK IFRS REPORT (CONSOLIDATED) NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES [continued] 2.4. Accounting for acquisition [continued] The Group calculates the fair value of identified assets and liabilities assumed on discounted cash-flow model. The 3 year period explicit cash-flow model serves as a basis for the impairment test by which the Group defines the impairment need on goodwill based on the strategic factors and financial data of its cash-generating units. The Group, in its strategic plan, has taken into consideration the effects of the present global economic situation, the present economic growth and outlook, the associated risks and their possible effect on the financial sector as well as the current and expected availability of wholesale funding. Negative goodwill (gain from bargain purchase), when the interest of the acquirer in the net fair value of the acquired identifiable net assets exceeds the cost of the business combination, is recognized immediately in the Consolidated Statement of Profit or Loss as “Other income”. 2.5. Securities at amortized cost The Group measures at amortized cost those securities which are held for contractual cash collecting purposes, and contractual terms of these securities give rise to cash flows that are solely payment of principal and interest on the principal amount outstanding. The Group initially recognizes these securities at fair value. Securities at amortized cost are subsequently measured using the effective interest (“EIR”) method and are subject to impairment. The amortisation of any discount or premium on the acquisition of a security at amortized cost is part of the amortized cost and is recognized as interest income so that the revenue recognized in each period represents a constant yield on the investment. Securities at amortized cost are accounted for on a trade date basis. Such securities comprise mainly securities issued by the Hungarian and foreign Governments, corporate bonds, mortgage bonds and discounted treasury bills. 2.6. Financial assets at fair value through profit or loss 2.6.1. Securities held for trading Investments in securities are accounted for on a trade date basis and are initially measured at fair value. Securities held for trading are measured at subsequent reporting dates at fair value, so unrealized gains and losses on held for trading securities are recognized in profit or loss and included in the Consolidated Statement of Profit or Loss for the period. The Group holds held for trading securities within the business model to obtain short-term gains, consequently realized and unrealized gains and losses are recognized in the net operating income, while interest income is recognized in income similar to interest income. Such securities consist of equity instruments, shares in investment funds, Hungarian and foreign government bonds, corporate bonds, discounted treasury bills, mortgage bonds and other securities. 2.6.2. Financial assets designated as fair value through profit or loss The Group may - at initial recognition - irrevocable designate a financial asset as measured at fair value through profit or loss that would otherwise be measured at fair value through other comprehensive income or at amortized cost. The Group uses fair value designation if the classification eliminates or significantly reduces a measurement or recognition inconsistency that would otherwise arise from measuring assets or liabilities or recognising the gains and losses on them on different bases (‘accounting mismatch’). The use of the fair value designation is based only on direct decision of management of the Group. The Group currently doesn’t apply this method. INTEGRATED ANNUAL REPORT 2022 354 OTP BANK IFRS REPORT (CONSOLIDATED) NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES [continued] 2.6. Financial assets at fair value through profit or loss [continued] 2.6.3. Derivative financial instruments In the normal course of business, the Group is a party to contracts for derivative financial instruments, which represent a low initial investment compared to the notional value of the contract and their value depends on value of underlying asset and are settled in the future. The derivative financial instruments used include interest rate forward or swap agreements and currency forward or swap agreements and options. These financial instruments are used by the Group both for trading purposes and to hedge interest rate risk and currency exposures associated with its transactions in the financial markets (it is the so-called economic hedge, accounting hedge is described later). Derivative financial instruments are accounted for on a trade date basis and are initially measured at fair value and at subsequent reporting dates also at fair value. Fair values are obtained from quoted market prices, discounted cash-flow models and option pricing models as appropriate. The Group adopts a multi curve valuation approach for calculating the net present value of future cash-flows – based on different curves used for determining forward rates and used for discounting purposes. It shows the best estimation of such derivative deals that are collateralised as the Group has almost all of its open derivative transactions collateralised. Changes in the fair value of derivative financial instruments that do not qualify for hedge accounting are recognized in profit or loss and are included in the Consolidated Statement of Profit or Loss for the period. Each derivative deal is determined as asset when fair value is positive and as liability when fair value is negative. Certain derivative transactions, while providing effective economic hedges under the risk management policy of the Group, do not qualify for hedge accounting under the specific rules of IFRS 9 and are therefore treated as derivatives held for trading with fair value gains and losses charged directly to the Consolidated Statement of Profit or Loss. Foreign currency contracts Foreign currency contracts are agreements to exchange specific amounts of currencies at a specified rate of exchange, at a spot date (settlement occurs two days after the trade date) or at a forward date (settlement occurs more than two days after the trade date). The notional amount of these forward contracts does not represent the actual market or credit risk associated with these contracts. Foreign currency contracts are used by the Group for risk management and trading purposes. The risk management foreign currency contracts of the Group were used to hedge the exchange rate fluctuations of loans and deposits to credit institutions denominated in foreign currency. Foreign exchange swaps and interest rate swaps The Group enters into foreign exchange swap and interest rate swap (“IRS”) transactions. The swap transaction is an agreement concerning the swap of certain financial instruments, which usually consists of spot and one or more forward contracts. IRS transactions oblige two parties to exchange one or more payments calculated with reference to fixed or periodically reset rates of interest applied to a specific notional principal amount (the base of the interest calculation). Notional principal is the amount upon which interest rates are applied to determine the payment streams under IRS transactions. Such notional principal amounts often are used to express the volume of these transactions but are not actually exchanged between the counterparties. IRS transactions are used by the Group for risk management and trading purposes. Cross-currency interest rate swaps The Group enters into cross-currency interest rate swap (CCIRS) transactions which have special attributes, i.e. the parties exchange the notional amount at the beginning and also at the maturity of the transaction. A special type of these deals is the mark-to-market CCIRS agreements. For these kind of transactions the parties – in accordance with the foreign exchange prices – revalue the notional amount during lifetime of the transaction. INTEGRATED ANNUAL REPORT 2022 355 OTP BANK IFRS REPORT (CONSOLIDATED) NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES [continued] 2.6. Financial assets at fair value through profit or loss [continued] 2.6.3 Derivative financial instruments [continued] Equity and commodity swaps Equity swaps obligate two parties to exchange more payments calculated with reference to periodically reset rates of interest and performance of indices. A specific notional principal amount is the base of the interest calculation. The payment of index return is calculated on the basis of current market price compared to the previous market price. In case of commodity swaps payments are calculated on the basis of the strike price of a predefined commodity compared to its average market price in a period. Forward rate agreements (FRA) A forward rate agreement is an agreement to settle amounts at a specified future date based on the difference between an interest rate index and an agreed upon fixed rate. Market risk arises from changes in the market value of contractual positions caused by movements in interest rates. The Group limits its exposure to market risk by entering into generally matching or offsetting positions and by establishing and monitoring limits on unmatched positions. Credit risk is managed through approval procedures that establish specific limits for individual counterparties. The Group’s forward rate agreements were transacted for management of interest rate exposures and have been accounted for at mark-to-market fair value. Foreign exchange options A foreign exchange option is a derivative financial instrument that gives the owner the right to exchange money denominated in one currency into another currency at a pre-agreed exchange rate at a specified future date. The transaction, for a fee, guarantees a worst-case exchange rate for the futures purchase of one currency for another. These options protect against unfavourable currency movements while preserving the ability to participate in favourable movements. 2.7. Hedge accounting Derivative financial instruments designated as a fair-value hedge Changes in the fair value of derivatives that are designated and qualify as hedging instruments in fair value hedges and that prove to be highly effective in relation to the hedged risk, are recorded in the Consolidated Statement of Profit or Loss along with the corresponding change in fair value of the hedged asset or liability that is attributable to the specific hedged risk. Changes in the fair value of hedging instrument in fair value hedges is charged directly to the Consolidated Statement of Profit or Loss. The conditions of hedge accounting applied by the Bank are the following: formally designated as hedge relationship, proper hedge documentation is prepared, effectiveness test is performed and based on it the hedge is qualified as effective. In the case of a financial instrument measured at amortised cost the Group recognises the hedging gain or loss on the hedged item as the modification of its carrying amount and it is recognised in profit or loss. These adjustments of the carrying amount are amortised to the profit or loss using the effective interest rate method. The Group starts the amortisation when the hedged item is no longer adjusted by the hedging gains or losses. If the hedged item is derecognised, the Group recognises the unamortised fair value in profit or loss immediately. For fair value hedges inefficiencies and the net revaluation of hedged and hedging item are recognized in the Net results on derivative instruments and hedge relationships. The Group implemented hedge accounting rules prescribed by IFRS 9 in 2018. For further details please see Note 48.3. Derivative financial instruments designated as cash-flow hedge Changes in the fair value of derivatives that are designated and qualify as hedging instrument in cash-flow hedges and that prove to be highly effective in relation to the hedged risk are recognized in their effective portion as reserve in Other Comprehensive Income. The ineffective element of the changes in fair value of hedging instrument is charged directly to the Consolidated Statement of Profit or Loss. INTEGRATED ANNUAL REPORT 2022 356 OTP BANK IFRS REPORT (CONSOLIDATED) NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES [continued] 2.7. Hedge accounting [continued] Derivative financial instruments designated as cash-flow hedge [continued] The Group terminates the hedge relationship if the hedging instrument expires or is sold, terminated or exercised, or the hedge no longer meets the criteria for hedge accounting. In the case of cash-flow hedges – in line with the standard - hedge accounting is still applied by the Group as long as the underlying asset is derecognized or terminated. When the Group discontinues hedge accounting to a cash-flow hedge the amount in the cash flow hedge reserve is reclassified to the profit or loss if the hedged future cash flows are no longer expected to occur. If the hedged future cash flows are still expected to occur, the amount remains in the cashflow hedge reserve and reclassified to the profit and loss only when the future cash flows occur. Net investment hedge in foreign operations Hedges of a net investment in a foreign operation, including a hedge of a monetary item that is accounted for as part of the net investment, shall be accounted for similarly to cash flow hedges. On the disposal of a foreign operation, the cumulative value of any gains and losses recognized in Other Comprehensive Income is transferred to the Consolidated Statement of Profit or Loss. The Group has terminated these transactions since 2020. 2.8. Offsetting Financial assets and liabilities are offset and the net amount is reported in the Consolidated Statement of Financial Position when the Group has a legally enforceable right to set off the recognized amounts and the transactions are intended to be reported in the Consolidated Statement of Financial Position on a net basis. In case of the derivative financial instruments the Group applies offsetting and net presentation in the Consolidated Statement of Financial Position when the Group has the right and the ability to settle these assets and liabilities on a net basis. 2.9. Embedded derivatives Sometimes, a derivative may be a component of a combined or hybrid contract that includes a host contract and a derivative (the embedded derivative) affecting cash-flows or otherwise modifying the characteristics of the host instrument. An embedded derivative must be separated from the host instrument and accounted for as a separate derivative if, and only if: • The economic characteristics and risks of the embedded derivative are not closely related to the economic characteristics and risks of the host contract; • A separate financial instrument with the same terms as the embedded derivative would meet the definition of a derivative as a stand-alone instrument; and • The host instrument is not measured at fair value or is measured at fair value but changes in fair value are recognized in Other Comprehensive Income. As long as a hybrid contract contains a host that is a financial asset the general accounting rules for classification, recognition and measurement of financial assets are applicable for the whole contract and no embedded derivative is separated. Derivatives that are required to be separated are measured at fair value at initial recognition and subsequently. If the Group is unable to measure the embedded derivative separately either at acquisition or at the end of a subsequent financial reporting period, the Group shall designate the entire hybrid contract as at fair value through profit or loss. The Group shall assess whether an embedded derivative is required to be separated from the host contract and accounted for as a derivative when the Bank first becomes a party to the contract. The separation rules for embedded derivatives are only relevant for financial liabilities. 2.10. Securities at fair value through other comprehensive income Securities at fair value through other comprehensive income are held within a business model whose objective is achieved by both collecting of contractual cash flows and selling securities. Furthermore, the contractual terms of these securities give rise on specified dates to cash flows that are solely payment of principal and interest on the principal amount outstanding. INTEGRATED ANNUAL REPORT 2022 357 OTP BANK IFRS REPORT (CONSOLIDATED) NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES [continued] 2.10. Securities at fair value through other comprehensive income [continued] Debt instruments Investments in debt securities are accounted for on a trade date basis and are initially measured at fair value. Securities at fair value through other comprehensive income are measured at subsequent reporting dates at fair value. Unrealized gains and losses on securities at fair value through other comprehensive income are recognized directly in Other Comprehensive Income, except for interest and foreign exchange gains/losses on monetary items, unless such financial asset at fair value through other comprehensive income is part of an effective hedge. Such gains and losses are reported when realized in Consolidated Statement of Profit or Loss for the applicable period. For debt securities at fair value through other comprehensive income the loss allowance is calculated based on expected credit loss model. The expected credit loss is accounted for against Other Comprehensive Income. Securities at fair value through other comprehensive income are remeasured at fair value based on quoted prices or amounts derived from cash-flow models. In circumstances where the quoted market prices are not readily available, the fair value of debt securities is estimated using the present value of future cash-flows and the fair value of any unquoted equity instruments are calculated using the EPS ratio. Such securities consist of Hungarian and foreign government bonds, corporate bonds, mortgage bonds, interest- bearing Treasury bills, securities issued by the NBH and other securities. Fair value through other comprehensive income option for equity instruments The Group has elected to present in the Statement of Other Comprehensive Income changes of fair value of those equity instruments which are neither held for trading nor recognized as contingent consideration under IFRS 3. In some cases, the Group made an irrevocable election at initial recognition for certain equity instruments to present subsequent changes in fair value of these securities in the consolidated other comprehensive income instead of in profit or loss. The use of the fair value option is based only on direct decision of management of the Group. 2.11. Loans, placements with other banks, repo receivables and loss allowance for loan and placements and repo receivable losses The Group measures at amortized cost those Loans and placements with other banks and repo receivables, which are held to collect contractual cash flows, and contractual terms of these assets give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding. These loans are recognized as Loans at amortized cost in the Consolidated Statement of Financial Position. The Group recognizes those financial assets which are not held for trading and do not give rise to contractual cash flows that are solely payments of principal and interest on the principal amount outstanding as loans measured at fair value through profit or loss. These loans are recognized as Loans mandatorily at fair value through profit or loss in the Consolidated Statement of Financial Position. Those Loans and placements with other banks and repo receivables that are accounted at amortized cost, stated at the principal amounts outstanding (including accrued interest), net of allowance for loan or placement losses, respectively. In case of the above mentioned financial assets measured at amortised cost transaction fees and charges adjust the carrying amount at initial recognition and are included in effective interest calculation. In case of loans at fair value through profit or loss fees and charges are recognised when incurred in the Consolidated Statement of Profit or Loss. Loans and placements with other banks and repo receivables are derecognized when the contractual rights to the cash-flows expire or they are transferred. When a financial asset is derecognized the difference of the carrying amount and the consideration received is recognized in the profit or loss in case of financial assets at amortised cost the gains or losses from derecognition are presented in “Gains/losses from derecognition of financial assets at amortised cost” line while in case of loans at fair value through profit or loss the gains or losses from derecognition are presented in “Net operating income”. INTEGRATED ANNUAL REPORT 2022 358 OTP BANK IFRS REPORT (CONSOLIDATED) NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES [continued] 2.11. Loans, placements with other banks, repo receivables and loss allowance for loan and placements and repo receivable losses [continued] Change in the fair value of loans at fair value through profit or loss is broken down into two components and presented in the Consolidated Statement of Profit or Loss as follows: • Portion of the change in fair value arising from changes in credit risk are presented within “Risk cost” as “Change in the fair value attributable to changes in the credit risk of loans mandatorily measured at fair value through profit of loss”. • The remaining component of the change is presented in fair value within “Net operating income” as “Fair value adjustment on financial instruments measured at fair value through profit or loss”. Initially financial assets shall be recognized at fair value which is usually equal to transaction value in case of loans and placements. However, when the amounts are not equal, the initial fair value difference should be recognized. If the fair value of financial assets is based on a valuation technique using only inputs observable in market transactions, the Group recognizes the initial fair value difference in the Consolidated Statement of Profit or Loss. When the fair value of financial assets is based on models for which inputs are not observable, the difference between the transaction price and the fair value is deferred and only recognized in profit or loss when the instrument is derecognized or the inputs became observable. Initial fair value of loans lent at interest below market conditions is lower than their transaction price, the subsequent measurement of these loans is under IFRS 9. The Group recognizes a loss allowance for expected credit losses on a financial asset at each reporting date. The loss allowance for a financial asset equals to 12-month expected credit loss or equals to the lifetime expected credit losses. The maximum period over which expected credit losses shall be measured is the maximum contractual period over which the Group is exposed to credit risk. If the credit risk on a financial asset has not increased significantly since initial recognition then 12-month expected credit losses, otherwise (in case of significant credit risk increase) lifetime expected credit losses should be calculated. The expected credit loss is the present value of the difference between the contractual cash flows that are due to the Group under the contract and the cash flows that the Group expects to receive. When the contractual cash flows of a financial asset are modified and the modification does not result in the derecognition of the financial asset the Group recalculates the gross carrying amount of the financial asset by discounting the expected future cash flows with the original effective interest rate of the asset. The difference between the carrying amount and the present value of the expected cash flows is recognized as a modification gain or loss in the profit or loss. Interest and amortized cost are accounted using effective interest rate method. Write-offs are generally recorded after all reasonable restructuring or collection activities have taken place and the possibility of further recovery is considered to be remote. The loan is written off against the related account “Gain / (Loss) from derecognition of financial assets at amortized cost” in the Consolidated Statement of Profit or Loss. The Group applies partial or full write-off for loans based on the definitions and prescriptions of financial instruments in accordance with IFRS 9. If the Group has no reasonable expectations regarding a financial asset (loan) to be recovered, it will be written off partially or fully at the time of emergence. The gross amount and loss allowance of the loans shall be written off in the same amount to the estimated maximum recovery amount while the net carrying value remains unchanged. Subsequent recoveries for loans previously written-off partially or fully, which may have been derecognized from the books with no reasonable expectations for the recovery will be booked in the Consolidated Statement of Profit or Loss on “Income from recoveries of written-off, but legally existing loan” line in Risk cost. INTEGRATED ANNUAL REPORT 2022 359 OTP BANK IFRS REPORT (CONSOLIDATED) NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES [continued] 2.12. Modified assets If the net present value of the contracted cash flows changes due to the modification of the contractual terms and it is not qualified as derecognition, modification gain or loss should be calculated and accounted for in the Consolidated Statement of Profit or Loss. Modification gain or loss is accounted in cases like restructuring – as defined in guidelines of the Group – prolongation, renewal with unchanged terms, renewal with shorter terms and prescribing capital repayment rate, if it doesn’t exist or has not been earlier. The changes of net present value should be calculated on portfolio level in case of retail exposures. Each retail contract is restructured based on restructuring frameworks. The Group has to evaluate these frameworks (and not individual contracts). The changes of net present value should be calculated individually on contract level in case of corporate portfolio. Among the possible contract amendments, the Group considers as a derecognition and a new recognition when the discounted present value – discounted at the original effective interest rate – of the cash flows under the new terms is at least 10 per cent different from the discounted present value of the remaining cash flows. In case of derecognition and new recognition the unamortized fees of the derecognized asset should be presented as Income similar to interest income. The newly recognized financial asset is initially measured at fair value and is placed in stage 1 if the derecognized financial asset was in stage 1 or stage 2 portfolio. The newly recognized financial asset will be purchased or originated credit impaired financial asset (“POCI”) if the derecognized financial asset was in stage 3 portfolio or it was POCI. The modification gain or loss shall be calculated at each contract amendments unless they are handled as a derecognition and new recognition. In case of modification the Group recalculates the gross carrying amount of the financial asset. To do this, the new contractual cash flows should be discounted using the financial asset’s original effective interest rate (or credit-adjusted effective interest rate for POCI financial asset). Any costs or fees incurred adjust the carrying amount of the modified financial asset are amortized over the remaining term of the modified financial asset. 2.13. Purchased or originated credit impaired financial assets Purchased or originated financial assets are credit-impaired on initial recognition. A financial asset is credit- impaired when one or more events that have a detrimental impact on the estimated future cash flows of that financial asset have occurred. A purchased credit-impaired asset is likely to be acquired at a deep discount. In unusual circumstances, it may be possible that an entity originates a credit-impaired asset, for example, following a substantial modification of a distressed financial asset that resulted in the derecogniton of the original financial asset. In the case of POCI financial assets, interest income is always recognized by applying the credit-adjusted effective interest rate. For POCI financial assets, in subsequent reporting periods an entity is required to recognize: - - the cumulative changes in lifetime expected credit losses since initial recognition as a loss allowance, the impairment gain or loss which is the amount of any change in lifetime expected credit losses. An impairment gain is recognized (with the parallel increase of the net amortized cost of receivable) if due to the favourable changes after initial recognition the lifetime expected credit loss estimation is becoming lower than the original estimated credit losses at initial recognition. The POCI qualification remains from initial recognition to derecognition in the Group’s books. INTEGRATED ANNUAL REPORT 2022 360 OTP BANK IFRS REPORT (CONSOLIDATED) NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES [continued] 2.14. Loss allowance A loss allowance for loans and placements with other banks and repo receivables is recognized by the Group based on the expected credit loss model in accordance with IFRS 9. Based on the three-stage model the recognized loss allowance equals to 12-month expected credit loss from the initial recognition. On financial assets with significantly increased credit risk or credit impaired financial assets (based on objective evidence) the recognized loss allowance is the lifetime expected credit loss. In the case of purchased or originated credit impaired financial assets, a loss allowance is recognized in the amount of the lifetime expected credit loss since initial recognition. The impairment gain in the Consolidated Statement of Profit or Loss is recognized if lifetime expected credit loss for purchased or originated credit impaired financial assets at measurement date is less than the estimated credit loss at initial recognition. A loss allowance for loans and placements with other banks and repo receivables represents Management’s assessment for potential losses in relation to these activities. Loss allowance for loan and placements are determined at a level that provides coverage for individually identified credit losses. For loans for which it is not possible to determine the amount of the individually identified credit loss in the absence of objective evidence, a collective impairment loss is recognized. With this, the Group reduces the carrying amount of financial asset portfolios with similar credit risk characteristics to the amount expected to be recovered based on historical loss experience. At subsequent measurement the Group recognizes an impairment gain or loss through “Impairment gain on POCI loans” in the Consolidated Statement of Profit or Loss as part of “Risk cost” line as an amount of expected credit losses or reversal which is required to adjust the loss allowance at the reporting date to the amount that is required to be recognized in accordance with IFRS 9. If the reason for the impairment no longer exist the impairment is released in the Consolidated Statement of Profit or Loss for the current period. If a financial asset, for which previously there were no indicators of significant increase in credit risk (i.e. classified in Stage 1) is subsequently classified in Stage 2 or Stage 3 then loss allowance is adjusted to lifetime expected credit loss. If a financial asset, which was previously classified in Stage 2 or Stage 3 is subsequently classified in Stage 1 then the loss allowance is adjusted to the level of 12 month expected credit loss. Classification into risk classes According to the requirements of the IFRS9 the Group classifies the financial assets measured at amortized cost, at fair value through other comprehensive income and loan commitments and financial guarantees into the following stages: • Stage 1 – performing financial instruments without significant increase in credit risk since initial recognition • Stage 2 – performing financial instruments with significant increase in credit risk since initial recognition but not credit-impaired • Stage 3 – non-performing, credit-impaired financial instruments • POCI – purchased or originated credit impaired In the case of trade receivables the Group applies the simplified approach and calculates only lifetime expected credit loss. The simplified approach is the following: - for the past 3 years the average annual balance of receivables under simplified approach is calculated, - the written-off receivables under simplified approach are determined in the past 3 years, - historical losses are adjusted to reflect information about current conditions and reasonable forecasts of future economic conditions, - the loss allowance ratio is the sum of the written-off amounts divided by the sum of the average balances, - the loss allowance is multiplied by the end-of-year balance, it is the actual loss allowance on these receivables, - loss allowance should be recalculated annually. INTEGRATED ANNUAL REPORT 2022 361 OTP BANK IFRS REPORT (CONSOLIDATED) NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES [continued] 2.14. Loss allowance [continued] Classification into risk classes [continued] The Group assumes that the credit risk on a financial instrument has not increased significantly since initial recognition if the financial asset is determined to have low credit risk at the reporting date. This might occur if the financial asset has a low risk of default, the borrower has a strong capacity to meet its contractual cash flow obligations in the near term and adverse changes in economic and business conditions in the longer term may, but will not necessarily, reduce the ability of the borrower to fulfil its contractual cash flow obligations. The Group considers sovereign exposures as having low credit risk. Stage 1: financial instruments for which the events and conditions specified in respect of Stage 2 and Stage 3 do not exist on the reporting date. A client or loan must be qualified as default if one or both the following two conditions occur: • The client delays more than 90 days. This is considered a hard trigger. • There is reasonable probability that the client will not pay all of its obligation. This condition is examined on the basis of probability criteria of default. The subject of default qualification is that exposure (on-balance and off-balance) which originates credit risk (so originated from loan commitments, risk-taking contracts). A financial instrument shows significant increase in credit risk, and is allocated to Stage 2, if in respect of which any of the following triggers exist on the reporting date, without fulfilling any of the conditions for the allocation to the non-performing stage (stage 3): the payment delay exceeds 30 days, it is classified as performing forborne, • • • based on individual decision, its currency suffered a significant "shock" since the disbursement of the loan, • the transaction/client rating exceeds a predefined value or falls into a determined range, or compared to the historic value it deteriorates to a predefined degree, in the case retail mortgage loans, the loan-to-value ratio exceeds a predefined rate, • • default on another loan of the retail client, if no cross-default exists, • monitoring classification of corporate and municipal clients above different thresholds defined on group - - financial difficulties at the debtor (capital adequacy, liquidity, deterioration of the instrument quality), significant decrease of the liquidity or the activity on the active market of the financial instrument can be observed, the rating of the client reflects high risk, but it is better than the default one, significantly decrease in the value of the recovery from which the debtor would disburse the loan, - - - clients under liquidation. A financial instrument is non-performing and it is allocated to Stage 3 when any of the following events or conditions exists on the reporting date: • default (based on the group level default definition), • classified as non-performing forborne (based on the group level forborne definition), • the monitoring classification of corporate and municipal clients above different thresholds defined on group level (including but not limited to): - breaching of contracts, - significant financial difficulties of the debtor (like capital adequacy, liquidity, deterioration of the instrument quality), bankruptcy, liquidation, debt settlement processes against debtor, forced strike-off started against debtor, termination of loan contract by the Bank, occurrence of fraud event, termination of the active market of the financial instrument. - - - - - INTEGRATED ANNUAL REPORT 2022 362 OTP BANK IFRS REPORT (CONSOLIDATED) NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES [continued] 2.14. Loss allowance [continued] Classification into risk classes [continued] If the exposure is no longer considered as credit impaired, the Group allocates this exposure to Stage 2. When loss allowance is calculated at exposures categorized into stages the following process is needed by stages: • Stage 1 (performing): loss allowance at an amount equal to 12-month expected credit loss should be recognized, • Stage 2 (significant increase in credit risk): loss allowance at an amount equal to lifetime expected credit loss should be recognized, • Stage 3 (non-performing): loss allowance at an amount equal to lifetime expected credit loss should be recognized. For lifetime expected credit losses, an entity shall estimate the risk of a default occurring on the financial instrument during its expected life. 12-month expected credit losses are a portion of the lifetime expected credit losses and represent the lifetime cash shortfalls that will result if a default occurs in the 12 months after the reporting date (or a shorter period if the expected life of a financial instrument is less than 12 months), weighted by the probability of that default occurring. An entity shall measure expected credit losses of a financial instrument in a way that reflects: - - - an unbiased and probability-weighted amount that is determined by evaluating a range of possible outcomes the time value of money and reasonable and supportable information that is available without undue cost or effort at the reporting date about past events, current conditions and forecasts of future economic conditions. 2.15. Sale and repurchase agreements, security lending Where debt or equity securities are sold under a commitment to repurchase them at a pre-determined price, they remain on the Consolidated Statement of Financial Position and the consideration received is recorded in Other liabilities or Amounts due to banks, the National Governments, deposits from the National Banks and other banks. Conversely, debt or equity securities purchased under a commitment to resell are not recognized in the Consolidated Statement of Financial Position and the consideration paid is recorded either in Placements with other banks or Deposits from customers. Interest is accrued based on the effective interest method evenly over the life of the repurchase agreement. In the case of security lending transactions, the Group does not recognize or derecognize the securities because believes that the transferor retains substantially all the risks and rewards of the ownership of the securities. Only a financial liability or financial receivable is recognized for the consideration amount. 2.16. Associates and other investments Companies where the Bank has the ability to exercise significant influence are accounted for using the equity method. Subsidiaries and associated companies that were not accounted for using the equity method and other investments where the Bank does not hold a significant interest are recorded according to IFRS 9. When an investment in an associate is held indirectly through an entity that is a venture capital fund, the Group elects to measure these investments in the associate at fair value through profit or loss in accordance with IFRS 9. Under the equity method, the investment is initially recognized at cost, and the carrying amount is adjusted subsequently for: - - the Group’s share of the post-acquisition profits or losses of the investee, which are recognized in the Group’s Consolidated Statement of Profit or Loss; and the distributions received from the investee, which reduce the carrying amount of the investment. INTEGRATED ANNUAL REPORT 2022 363 OTP BANK IFRS REPORT (CONSOLIDATED) NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES [continued] 2.16. Associates and other investments [continued] The Group’s share of the profits or losses of the investee, or other changes in the investee’s equity, is determined on the basis of its proportionate ownership interest. The Group recognizes its share of the investee’s income and losses based on the percentage of the equity interest owned by the Group. Gains and losses on the sale of investments are determined based on the specific identification of the cost of each investment. 2.17. Property and equipment, Intangible assets Property and equipment and Intangible assets are measured at cost, less accumulated depreciation and amortization and impairment, if any. Internally generated intangibles, excluding capitalized development costs, are not capitalized – the related expenditures are accounted as cost in the period in which they are incurred. Development costs are capitalized only when the technical and commercial feasibility of the asset has been clearly demonstrated, the Group has the intent and ability to complete the intangible asset and either use it or sell it and be able to demonstrate how the asset will generate future economic benefits. Amortization of these type of assets begins when development is completed, and the asset is available for use. During the period of development, the asset is tested for impairment annually. The Group lists mainly self-developed software among internally generated intangible assets. The depreciable amount (book value less residual value) of the non-current assets must be allocated over the useful lives. Depreciation and amortization are computed usually by using the straight-line method over the estimated useful lives of the assets based on the following annual percentages: Annual percentages Useful life period (years) Intangible assets Software Property right Property Machinery and office equipment Vehicle 6.3% - 50.0% 16.7% - 33.3% 1.0% - 50.0% 3.3% - 50.0% 3.0% - 33.3% 2 – 15 3 – 6 2 – 100 2 – 30 3 – 33 Depreciation and amortization on Property and equipment and Intangible assets commence on the day such assets are ready to use. At each balance sheet date, the Group reviews the carrying value of its Property and equipment and Intangible assets to determine if there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated to determine the extent (if any) of the impairment loss. Where it is not possible to estimate the recoverable amount of an individual asset, the Group estimates the recoverable amount of the cash-generating unit to which the asset belongs. Where the carrying value of Property and equipment and Intangible assets is greater than the estimated recoverable amount, it is impaired immediately to the estimated recoverable amount. The Group may conclude contracts for purchasing property, equipment and intangible assets, where the purchase price is settled in foreign currency. By entering into such agreements, firm commitment in foreign currency due on a specified future date arises at the Group. Reducing the foreign currency risk caused by firm commitment, forward foreign currency contracts may be concluded to ensure the amount payable in foreign currency on a specified future date on one hand and to eliminate the foreign currency risk arising until settlement date of the contract on the other hand. In the case of an effective hedge the realized profit or loss of the hedging instrument is stated as the part of the cost of the hedged asset as it has arisen until recognizing the asset. INTEGRATED ANNUAL REPORT 2022 364 OTP BANK IFRS REPORT (CONSOLIDATED) NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES [continued] 2.18. Inventories Inventories are measured at the lower of cost and net realisable value. The cost of inventories comprises all costs of purchase, costs of conversion and other costs incurred in bringing the inventories to their present location and condition. The Group uses generally FIFO formulas to the measurement of inventories. Inventories are removed from books when they are sold, unusable or destroyed. When inventories are sold, the carrying amount of those inventories are recognized as an expense in the period in which the related revenue is recognized. Repossessed assets are classified as inventories. The Group's policy is to sell repossessed assets and not to use them for its internal operations. 2.19. Government grants and government assistance The Group recognise government grants only when there is a reasonable assurance that the grant will be received, and all attached conditions will be complied with. The Group presents grants relating to assets as deferred income in the Consolidated Statement of Financial Position, which is recognized in profit or loss on a systematic basis over the useful life of the asset. Grants related to an expense item are recorded as another operating income in those periods when the related costs were recognized. 2.20. Financial liabilities The financial liabilities are presented within these lines in the Consolidated Financial Statements: Financial liabilities designated at fair value through profit or loss - Amount due to banks, the National Governments, deposits from the National Banks and other banks - Repo liabilities - - Deposits from customers - - Derivative financial liabilities held for trading - Derivative financial liabilities designated as hedge accounting - Other financial liabilities Liabilities from issued securities At initial recognition, the Group measures financial liabilities at fair value plus or minus – in the case of a financial liability not at fair value through profit or loss – transaction costs that are directly attributable to the acquisition or issue of the financial liability. Usually, the initial fair value of financial liabilities equals to transaction value. However, when the amounts are not equal, the initial fair value difference should be recognized. If the fair value of financial liabilities is based on a valuation technique using only inputs observable in market transactions, the Group recognizes the initial fair value difference in the Consolidated Statement of Profit or Loss. When the fair value of financial liabilities is based on models for which inputs are not observable, the difference between the transaction price and the fair value is deferred and only recognized in profit or loss when the instrument is derecognized or the inputs became observable. Financial liabilities at fair value through profit or loss are either financial liabilities held for trading or they are designated upon initial recognition as at fair value through profit or loss. In connection to the derivative financial liabilities measured at fair value through profit or loss, the Group presents the amount of change in their fair value originated from the changes of market conditions and business environment. The Group designated some financial liabilities upon initial recognition to measure at fair value through profit or loss. This classification eliminates or significantly reduces a measurement or recognition inconsistency that would otherwise arise from measuring assets or liabilities or recognising the gains and losses on them on different bases (“accounting mismatch”). The changes in fair value of these liabilities are recognized in profit or loss, except the fair value changes attributable to credit risk which are recognized among other comprehensive income. INTEGRATED ANNUAL REPORT 2022 365 OTP BANK IFRS REPORT (CONSOLIDATED) NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES [continued] 2.20. Financial liabilities [continued] In the case of financial liabilities measured at amortized cost fees and commissions related to the origination of the financial liability are recognized through profit or loss during the maturity of the instrument using effective interest method. In certain cases, the Group repurchases a part of financial liabilities (mainly issued securities or subordinated bonds) and the difference between the carrying amount of the financial liability and the amount paid for it is recognized in the net profit or loss for the period and included in other operating income. 2.21. Leases The Group as a lessor Leases are classified as finance leases whenever the terms of the lease transfer substantially all the risks and rewards of ownership to the lessee. All other leases are classified as operating leases. Lease classification is made at the inception date and is reassessed only if there is a lease modification. Finance leases At the commencement date, a lessor derecognizes the assets held under a finance lease in the Consolidated Statement of Financial Position and present them as a receivable at an amount equal to the net investment in the lease. The lessor shall use the interest rate implicit in the lease to measure the net investment in the lease. Direct costs such as commissions are included in the initial measurement of the finance lease receivables. The Group as a lessor recognizes finance income over the lease term, based on a pattern reflecting a constant periodic rate of return on the Group’s net investment in the lease. The Group applies the lease payments relating to the period against the gross investment in the lease to reduce both the principal and the unearned finance income. The Group applies the derecognition and impairment requirements in IFRS 9 to the net investment in the lease (for more details, see Note 2.14.). Operating leases The Group as a lessor recognizes lease payments from operating leases as income on either a straight-line basis or another systematic basis. Costs, including depreciation, incurred in earning the lease income are recognized as an expense. Initial direct costs incurred in obtaining an operating lease are added to the carrying amount of the underlying asset and recognized as an expense over the lease term on the same basis as the lease income. The depreciation policy for depreciable underlying assets subject to operating leases is consistent with the Group’s normal depreciation policy for similar assets. The Group accounts for a modification to an operating lease as a new lease from the effective date of the modification, considering any prepaid or accrued lease payments relating to the original lease as part of the lease payments for the new lease. The Group as a lessee The Group recognizes a right-of-use asset and a lease liability at the commencement of the lease term except for short-term leases and leases, where the underlying asset is of low value (less than USD 5,000). For these leases, the Group recognizes the lease payments as an expense on either a straight-line basis over the lease term or another systematic basis if that basis is more representative of the pattern of the lessee’s benefit. Deferred tax implication if the Group is lessee: At the inception of the lease, there is no net lease asset or liability, no tax base and, therefore, no temporary difference. Subsequently, as depreciation on the right-of-use asset initially exceeds the rate at which the debt reduces, a net liability arises resulting in a deductible temporary difference on which a deferred tax asset should be recognized if recoverable. Assuming that the lease liability is not repaid in advance, the total discounted cash outflows should equal the total rental payments deductible for income tax purposes. INTEGRATED ANNUAL REPORT 2022 366 OTP BANK IFRS REPORT (CONSOLIDATED) NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES [continued] 2.21. Leases [continued] Right-of-use asset The right-of-use assets are presented separately in the Consolidated Statement of Financial Position and initially measured at cost, subsequently the Group applies the cost model and these assets are depreciated on a straight line basis from the commencement date to the earlier of the end of the useful life of the right-of-use asset or the end of the lease term. If the lease transfers ownership of the underlying asset to the Group by the end of the lease term or if the cost of the right-of-use asset reflects that the Group will exercise a purchase option, the right-of-use asset are depreciated from the commencement date to the end of the useful life of the underlying asset. Lease liability At the commencement date, the lease liability is measured at the present value of the lease payments that are not paid at that date discounted by using the rate implicit in the lease, or if this cannot be determined, by using the incremental borrowing rate of the Group.Variable lease payments that do not depend on an index or a rate but e.g. on revenues or usage are recognized as an expense. The Group always separates the non-lease components of the lease contracts and accounts them as an expense. Lease payments must be included in the measurement of the lease liability without value added taxes. Non-deductible VAT is recognized as other expense. The lease liability is remeasured in the event of a reassessment of the lease liability or lease modification 2.22. Investment properties Investment properties of the Group are land, buildings, part of buildings which held (as the owner or as the lessee under a finance lease) to earn rentals or for capital appreciation or both, rather than for use in the production or supply of services or for administrative purposes or sale in the ordinary course of business. The Group measures the investment properties at cost less accumulated depreciation and impairment, if any. The depreciable amount (book value less residual value) of the investment properties must be allocated over their useful lives. The depreciation and amortization are computed using the straight-line method over the estimated useful lives of the assets. The Group discloses the fair value of the investment properties in Note 14 established mainly by external experts. 2.23. Share capital Share capital is the capital determined in the Articles of Association and registered by the Budapest-Capital Regional Court. Share capital is the capital the Bank raised by issuing common stocks at the date the shares were issued. The amount of share capital has not changed over the current period. 2.24. Treasury shares Treasury shares are shares which are purchased on the stock exchange and the over-the-counter market by the Bank and its subsidiaries and are presented in the Consolidated Statement of Financial Position at cost as a deduction from Consolidated Shareholders’ Equity. Gains and losses on the sale of treasury shares are credited or charged directly to shareholder’s equity. INTEGRATED ANNUAL REPORT 2022 367 OTP BANK IFRS REPORT (CONSOLIDATED) NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES [continued] 2.25. Non-current assets held-for-sale and discontinued operations A discontinued operation is a component of an entity that either has been disposed of or is classified as held-for- sale. Hereinafter non-current assets classified as held-for-sale, disposal group and discontinued operations are referred to as assets in accordance with IFRS 5. The Group classifies assets under IFRS 5 if their carrying amount will be recovered principally through a sale transaction rather than through continuing use. The Group does not account for an asset under IFRS 5 that has been temporarily taken out of use as if it had been abandoned. The Group measures an asset under IFRS 5 at the lower of its carrying amount and fair value less costs to sell. When the sale is expected to occur beyond one year, the Group measures the costs to sell at their present value. Any increase in the present value of the costs to sell that arises from the passage of time shall be presented in profit or loss. Immediately before the initial classification of the asset under IFRS 5, the carrying amounts of the asset (or all the assets and liabilities in the group) are measured in accordance with applicable IFRS. The Group does not depreciate (or amortize) an asset under IFRS 5 while it is classified as asset in accordance with IFRS 5. Interest and other expenses attributable to the liabilities of the asset under IFRS 5 shall continue to be recognized. If the Group has classified an asset under IFRS 5, but the criteria for that are no longer met, the Group ceases to classify the asset under IFRS 5. The Group measures these assets which cease to be classified as asset under IFRS 5 at the lower of: - its carrying amount before the asset was classified as asset under IFRS 5, adjusted for any depreciation, amortisation or revaluations that would have been recognized had the asset not been classified as asset under IFRS 5, and - its recoverable amount at the date of the subsequent decision not to sell. The Group presents an asset classified as asset under IFRS 5 separately from other assets in the Consolidated Statement of Financial Position. The liabilities of the asset under IFRS 5 are presented separately from other liabilities in the Consolidated Statement of Financial Position. Those assets and liabilities shall not be offset and presented as a single amount. The major classes of assets and liabilities classified as held for sale or discontinued operations are separately disclosed in the Notes. The Group presents separately any cumulative income or expense recognized in other comprehensive income relating to a non-current asset (or disposal group) classified as held for sale. Results from discontinued operations are reported separately in the Consolidated Statement of Profit or Loss as result from discontinued operations. 2.26. Interest income and income similar to interest income and interest expense Interest income and expense are recognized in profit or loss in the period to which they relate, using the effective interest rate method. For exposures categorized into Stage 1 and Stage 2 the interest income is recognized on a gross basis. For exposures categorized into Stage 3 (using effective interest rate) and for POCI (using credit-adjusted effective interest rate) the interest income is recognized on a net basis. The time-proportional income similar to interest income of derivative financial instruments is calculated without using the effective interest method and the positive fair value adjustment of interest rate swaps are included in income similar to interest income. Interest income of loans at fair value through profit or loss is calculated based on interest fixed in the contract and presented in “Income similar to interest income” line. Interest from loans and deposits are accrued on a daily basis. Interest income and expense include certain transaction costs and the amortisation of any discount or premium between the initial carrying amount of an interest-bearing instrument and its amount at maturity calculated on an effective interest rate basis. All interest income and expense recognized are arising from loans, placements with other banks, repo receivables, securities at fair value through other comprehensive income, securities at amortized cost and amounts due to banks, repo liabilities, deposits from customers, liabilities from issued securities, subordinated bonds and loans are presented under these lines of Consolidated Financial Statements. INTEGRATED ANNUAL REPORT 2022 368 OTP BANK IFRS REPORT (CONSOLIDATED) NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES [continued] 2.27. Fees and Commissions Fees and commissions that are not involved in the amortized cost model are recognized in the Consolidated Statement of Profit or Loss on an accrual basis according to IFRS 15 Revenue from contracts with customers (see more details in Note 32). These fees are related to deposits, cash withdrawals, security trading, bank card etc. The Group recognizes income if performance obligations related to the certain goods or services are satisfied, performed, and control over the asset is transferred to the customer, and it is probable that consideration payable will probably flow to the entity. In case of those services, where the Group transfers control over the asset continuously, income is recognised on accrual basis. The Group provides foreign exchange trading services to its customers, the profit margin achieved on these transactions is presented as Net profit from fees and commissions in the Consolidated Statement of Profit or Loss. 2.28. Profit from associates Profit from associates refers to any distribution of an entity earnings to shareholders from stocks or mutual funds that is owned by the Group. The Group recognizes profit from associates in the Consolidated Financial Statements when its right to receive payment is established. 2.29. Income tax The Group considers corporate income tax as current tax according to IAS 12. The Group also considers local business tax and the innovation contribution as income tax in Hungary. The annual taxation charge is based on the tax payable under fiscal regulations prevailing in the country where the company is incorporated, adjusted for deferred taxation. Deferred taxation is accounted for using the balance sheet liability method in respect of temporary differences between the tax bases of assets and liabilities and their carrying value for financial reporting purposes, measured at the tax rates that apply to the future period when the asset is expected to be realized or the liability is settled. Current tax asset or current tax liability is presented related to income tax and innovation contribution separately in the Consolidated Statement of Financial Position. Deferred tax assets are recognized by the Group for the amounts of income taxes that are recoverable in future periods in respect of deductible temporary differences as well as the carryforward of unused tax losses and the carryforward of unused tax credits. The Group recognizes a deferred tax asset for all deductible temporary differences arising from investments in subsidiaries, branches and associates, and interests in joint arrangements, to the extent that, and only to the extent that, it is probable that: - the temporary difference will reverse in the foreseeable future; and - taxable profit will be available against which the temporary difference can be utilised. The Group considers the availability of qualifying taxable temporary differences and the probability of other future taxable profits to determine whether future taxable profits will be available according to IAS 12. The Group recognizes a deferred tax liability for all taxable temporary differences associated with investments in subsidiaries, branches and associates, and interests in joint arrangements, except to the extent that both of the following conditions are satisfied: - - the Bank is able to control the timing of the reversal of the temporary difference, and it is probable that the temporary difference will not reverse in the foreseeable future. The Group only offsets its deferred tax liabilities against deferred tax assets when: - - there is a legally enforceable right to set-off current tax liabilities against current tax assets, and the taxes are levied by the same taxation authorities on either the same taxable entity or • • different taxable entities which intend to settle current tax liabilities and assets on a net basis. INTEGRATED ANNUAL REPORT 2022 369 OTP BANK IFRS REPORT (CONSOLIDATED) NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES [continued] 2.30. Banking tax The Bank and some of its subsidiaries are obliged to pay banking tax based on Act LIX of 2006. As the calculation is not based on the taxable profit but on the adjusted total assets as reported in the Separate Financial Statements of the Bank and its entities for the second period preceding the current tax year, therefore, the banking tax is considered as another administrative expense, not as income tax. Pursuant to Government Decree No. 197/2022 published on 4 June 2022, the Hungarian Government decided to impose a windfall tax on credit institutions and financial enterprises temporarily, that is for 2022 and 2023. As for 2022, the base of the windfall tax is the net revenues based on the 2021 financial statements, calculated according to local tax law, whereas the tax rate is 10%. 2.31. Off-balance sheet commitments and contingent liabilities In the ordinary course of its business, the Group enters into off-balance sheet commitments such as guarantees, letters of credit, commitments to extend credit and transactions with financial instruments. The provision for off- balance sheet commitments and contingent liabilities is maintained at a level adequate to absorb future cash outflows which are probable and relate to present obligations. In the case of commitments and contingent liabilities, the Management determines the adequacy of the loss allowance based upon reviews of individual items, recent loss experience, current economic conditions, the risk characteristics of the various categories of transactions and other pertinent factors. The Group recognizes provision for off-balance sheet commitment and contingent liabilities in accordance with IAS 37 when it has a present obligation as a result of a past event; it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation; and a reliable estimate can be made of the obligation. For financial guarantees and loan commitments given which are under IFRS 9 the expected credit loss model is applied when the provision is calculated (see more details in Note 2.14.). After initial recognition the Group subsequently measures those contracts at a higher of the amount of the loss allowance or of the amount initially recognised less the cumulative amount of income recognized in accordance with IFRS 15. 2.32. Share-based payment The Group has applied the requirements of IFRS 2 Share-based Payment. The Group issues equity-settled share-based payment to certain employees. Equity-settled share-based payment is measured at fair value at the grant date. The fair value determined at the grant date of the equity-settled share- based payment is expensed on a straight-line basis over the year, based on the Group’s estimate of shares that will eventually vest. Share-based payment is recorded in Consolidated Statement of Profit or Loss as Personnel expenses. Fair value is measured by use of a binomial model. The expected life used in the model has been adjusted, based on Management’s best estimate, for the effects of non-transferability, exercise restrictions, and behavioural considerations. 2.33. Employee benefits The Group has applied the requirement of IAS 19 Employee Benefits. These benefits are recognised as an expense and liability undiscounted in the Consolidated Financial Statements. Liabilities are regularly remeasured. Gains or losses due to the remeasurement are recognised in the Consolidated Statement of Profit or Loss. Short-term employee benefits are employee benefits (other than termination benefits) that are expected to be settled wholly before twelve months after the end of the annual reporting period in which the employees render the related service. These can be wages, salaries and bonuses, premium, paid annual leave and paid sick leave and other free services (health care, reward holiday). Long-term employee benefits are mostly the jubilee reward. Post-employment benefits are employee benefits (other than termination and short-term employee benefits) that are payable after the completion of employment. Post-employment benefit plans are formal or informal arrangements under which an entity provides post-employment benefits for one or more employees. Post- employment benefit plans are classified as either defined contribution plans or defined benefit plans, depending on the economic substance of the plan as derived from its principal terms and conditions. INTEGRATED ANNUAL REPORT 2022 370 OTP BANK IFRS REPORT (CONSOLIDATED) NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES [continued] 2.33. Employee benefits [continued] Defined benefit plan is post‑employment benefit plans other than defined contribution plan. The Group's net obligation is calculated by estimating the amount of employee's future benefit based on their services for the current and prior periods. The future value of benefit is being discounted to present value. Termination benefits are employee benefits provided in exchange for the termination of an employee’s employment as a result of either: an entity’s decision to terminate an employee’s employment before the normal retirement date or an employee’s decision to accept an offer of benefits in exchange for the termination of employment. Other long-term employee benefits are all employee benefits other than short-term employee benefits, postemployment benefits and termination benefits. 2.34. Biological assets and agricultural produce The Group recognises a biological asset or agricultural produce according to IAS 41 only when it controls the asset as a result of past events, it is probable that future economic benefits will flow and the fair value or the cost can be measured reliably. Biological assets are measured on initial recognition and at subsequent periods at fair value less estimated costs to sell unless fair value cannot be reliably measured. Agricultural produce is measured at fair value less estimated costs to sell at the point of harvest. The gain on initial recognition of biological assets at fair value less costs to sell, and changes in fair value less costs to sell of biological assets during a period are included in profit or loss for the period in which it arises as other operating income. 2.35. Consolidated Statement of Cash-flows Cash flows arising from the operating, investing or financing activities are reported in the Statement of Cash- Flows of the Group primarily on a gross basis. Net basis reporting are applied by the Group in the following cases: - when the cash flows reflect the activities of the customer rather than those of the Group, and - for items in which the turnover is quick, the amounts are large, and the maturities are short. For the purposes of reporting Consolidated Statement of Cash-flows, cash and cash equivalents include cash, due from banks and balances with the National Banks, excluding the compulsory reserve established by the National Banks. This line item shows balances of HUF and foreign currency cash amounts, and sight deposit from NBH and from other banks, furthermore, balances of current accounts. Consolidated cash-flows from hedging activities are classified in the same category as the item being hedged. The unrealized gains and losses from the translation of monetary items to the closing foreign exchange rates and unrealized gains and losses from derivative financial instruments are presented net as operating activity separately in the Consolidated Statement of Cash-flows for the monetary items which have been revaluated. 2.36. Segment reporting IFRS 8 Operating Segments requires operating segments to be identified on the basis of internal reports about components of the Group that are regularly reviewed by the chief operating decision maker in order to allocate resources to the segments and to assess their performance. Based on the above, the segments identified by the Group are the business and geographical segments. The Group’s operating segments under IFRS 8 are therefore as follows: OTP Core Hungary, Russia, Ukraine, Bulgaria, Romania, Serbia, Croatia, Montenegro, Albania, Moldova, Slovenia, Merkantil Group, Asset Management subsidiaries, Other subsidiaries, Corporate Center. 2.37. Comparative balances These Consolidated Financial Statements are prepared in accordance with the same accounting policies in all respects as the Consolidated Financial Statements prepared in accordance with IFRS as adopted by the European Union for the year ended 31 December 2021. INTEGRATED ANNUAL REPORT 2022 371 OTP BANK NOTE 3: SIGNIFICANT ACCOUNTING ESTIMATES AND DECISIONS IN THE APPLICATION OF ACCOUNTING POLICIES IFRS REPORT (CONSOLIDATED) The presentation of financial statements in conformity with IFRS as adopted by EU requires the Management of the Group to make judgement about estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as at the date of the financial statements and their reported amounts of revenues and expenses during the reporting period. The estimates and associated assumptions are based on the expected loss and other factors that are considered to be relevant. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period. Actual results could differ from those estimates. Significant areas of subjective judgement include: 3.1. Loss allowances on financial instruments exposed to credit risk The Group regularly assesses its financial instruments portfolio for loss allowance. Management determines the adequacy of the loss allowances based upon reviews of individual loans and placements, recent loss experience, current economic conditions, the risk characteristics of the various categories of loans and other pertinent factors. The use of the three-stage model was implemented for IFRS 9 purposes. The impairment methodology is used to classify financial instruments in order to determine whether credit risk has significantly increased since initial recognition and to identify the credit-impaired assets. For instruments with credit-impairment or significant increase of credit risk lifetime expected losses are recognized (see more details in Note 37.1.) 3.2. Valuation of instruments without direct quotations Financial instruments without direct quotations in an active market are valued using the valuation model technique. The models are regularly reviewed and each model is calibrated for the most recent available market data. While the models are built only on available data, their use is subject to certain assumptions and estimates (e.g. correlations, volatilities, etc.). Changes in the model assumptions may affect the reported fair value of the relevant financial instruments. IFRS 13 Fair Value Measurement seeks to increase the consistency and comparability in fair value measurements and related disclosures through a 'fair value hierarchy'. The hierarchy categorises the inputs used in valuation techniques into three levels. The hierarchy gives the highest priority to (unadjusted) quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The Group evaluates the levelling at each reporting period on an instrument-by-instrument basis and reclassifies instruments when necessary, based on the facts at the beginning of the reporting period. The objective of a fair value measurement is to estimate the price at which an orderly transaction to sell the asset or to transfer the liability would take place between market participants at the measurement date under current market conditions. 3.3. Provisions Provision is recognized and measured for commitments to extend credit and for warranties arising from banking activities based on IFRS 9 Financial Instruments. Provision for these instruments is recognized based on the credit conversion factor, which shows the proportion of the undrawn credit line that will probably be drawn. Other provisions are recognized and measured based on IAS 37 Provisions, Contingent Liabilities and Contingent Assets. The Group is involved in a number of ongoing legal disputes. Based upon historical experience and expert reports, the Group assesses the developments in these cases, and the likelihood and the amount of potential financial losses which are appropriately provided for. (See Note 24.) Other provision includes provision for litigation, provision for retirement and expected liabilities and provision for confirmed letter of credit. A provision is recognized by the Group when it has a present obligation as a result of a past event, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation, and a reliable estimate can be made of the amount of the obligation. INTEGRATED ANNUAL REPORT 2022 372 OTP BANK NOTE 3: SIGNIFICANT ACCOUNTING ESTIMATES AND DECISIONS IN THE APPLICATION OF ACCOUNTING POLICIES [continued] IFRS REPORT (CONSOLIDATED) 3.4. Impairment on goodwill Goodwill acquired in a business combination is tested for impairment annually or more frequently when there is an indication that the unit might be impaired, in accordance with IAS 36 “Impairment of assets”. The Group calculates the fair value based on discounted cash-flow model. The 3-year period explicit cash-flow model serves as a basis for the impairment test by which the Group defines the impairment need on goodwill based on the strategic factors and financial data of its cash-generating units. In the calculation of the goodwill impairment, also the expectations about possible variations in the amount or timing of those future cash-flows, the time value of money, represented by the current market risk-free rate of interest and other factors are reflected. 3.5. Business model A business model refers to how the Group manages its financial instruments in order to generate cash flows. It is determined at a level that reflects how groups of financial instruments are managed rather than at an instrument level. The financial assets held by the Group are classified into three categories depending on the business model within the financial assets are managed. • Business model whose objective is to hold financial assets in order to collect contractual cash flows. Some sales can be consistent with hold to collect business model and the Group assesses the nature, frequency and significance of any sales occurring. The Group does not consider the sale frequent when at least six months have elapsed between sales. The significant sales are those when the sales exceed 2% of the total hold to collect portfolio. Within this business model the Group manages mainly loans and advances and long-term securities and other financial assets. • Business model whose objective is achieved by both collecting contractual cash flows and selling financial assets. Within this business model the Group only manages securities. • Business model whose objective is to achieve gains in a short-term period. Within this business model the Group manages securities and derivative financial instrument. If cash flows are realised in a way that is different from the expectations at the date that the Bank/Group assessed the business model, that does not give rise to a prior error in the Group’s financial statements nor does it change the classification of the remaining financial assets held in that business model. When, and only when the Group changes its business model for managing financial assets it reclassifies all affected assets. Such changes are determined by the Group’s senior management as a result of external or internal changes and must be significant to the Group’s operations and demonstrable to external parties. The Group shall not reclassify any financial liability. 3.6. Contractual cash-flow characteristics of financial assets Classification of a financial asset is based on the characteristics of its contractual cash flows if the financial asset is held within a business model whose objective is to hold assets to collect contractual cash flows or within a business model whose objective is achieved by both collecting contractual cash flows and selling financial assets. The Group should determine whether the asset’s contractual cash flows are solely payments of principal and interest on the principal amount outstanding (SPPI test). Contractual cash flows that are solely payments of principal and interest on the principal amount outstanding are consistent with a basic lending arrangement. INTEGRATED ANNUAL REPORT 2022 373 OTP BANK NOTE 3: SIGNIFICANT ACCOUNTING ESTIMATES AND DECISIONS IN THE APPLICATION OF ACCOUNTING POLICIES [continued] IFRS REPORT (CONSOLIDATED) 3.6. Contractual cash-flow characteristics of financial assets [continued] Contractual terms that introduce exposure to risks or volatility in the contractual cash flows that is unrelated to a basic lending arrangement, such as exposure to changes in equity prices or commodity prices, do not give rise to contractual cash flows that are solely payments of principal and interest on the principal amount outstanding. The Group assesses whether contractual cash flows are solely payments of principal and interest on the principal amount outstanding for the currency in which the financial asset is denominated. The time value of money is the element of interest that provides consideration for only the passage of time. However, in some cases, the time value of money element may be modified. In such cases, the Group assesses the modification to determine whether the contractual cash flows represent solely payments of principal and interest on the principal amount outstanding. When assessing a modified time value of money element, the objective is to determine how different the undiscounted contractual cash flows could be from undiscounted cash flows that would arise if the time value of money element was not modified (the benchmark cash flows). The benchmark instrument can be an actual or a hypothetical financial asset. If the undiscounted contractual cash flows significantly – above 2% – differ from the undiscounted benchmark cash flows, the financial asset should be subsequently measured at fair value through profit or loss. INTEGRATED ANNUAL REPORT 2022 374 OTP BANK IFRS REPORT (CONSOLIDATED) NOTE 4: MACRO ENVIRONMENT, IMPACT OF ECONOMIC SITUATION ON THE GROUP The Covid-19 pandemic and the volatile economic environment in the post-Covid-19 era Since the outbreak of the COVID-19 pandemic, OTP Group has regularly updated its forecasts in light of the pandemic and the impact of the pandemic on the operations of OTP Group. However, the continuance of new waves of the pandemic emerging may require further revision by OTP Group to such macroeconomic scenarios and its estimations of credit impairments. Over the last 3 years, the COVID-19 pandemic severely impacted the evolution of the global economy. The supply- chain and logistic relationships were disrupted by periodic lockdowns and social distancing requirements and the supply of several key raw materials dropped significantly, leading to a more volatile economic environment compared to previous years. Raw material and energy prices rose steeply, leading to higher inflation and interest rates in some of OTP Group’s operating countries. The conflict between Russian and Ukraine and the subsequent implementation of sanctions on Russia have accelerated supply shortages and resulted in higher energy prices and more broad-based inflation. Several major central banks have already raised or are considering raising interest rates earlier than previously expected. The Hungarian central bank has already hiked rates since the summer of 2021. The risk of local currency devaluations versus EUR or USD has increased and could lead to a more volatile operating environment for OTP Group. This volatile environment could cause financial difficulties for OTP Group’s customers. The deteriorating credit quality of OTP Group’s customers may in particular result in increasing defaults and arrears in monthly payments on loans, higher credit impairments on the loan portfolios of OTP Group. Furthermore, lower demand for, and origination of, new loans could have a material adverse effect on the OTP Group’s results of operations. The OTP Group’s activities and the profitability of its operations are strongly affected by the macroeconomic environment and the domestic and international perception of the economies in which it operates. Furthermore, the OTP Group relies on models to support a broad range of business and risk management activities, including informing business decisions and strategies, measuring and limiting risk, valuing exposures, conducting stress testing and assessing capital adequacy. Models are, by their nature, imperfect and incomplete representations of reality because they rely on assumptions and inputs, and as such assumptions may later potentially prove to be incorrect, this can affect the accuracy of their outputs. This may be exacerbated when dealing with unprecedented scenarios, due to the lack of reliable historical reference points and data. Any and all such events mentioned above could have a material adverse effect on the OTP Group’s business, financial condition, results of operations, prospects, liquidity, capital position and credit ratings, as well as on the OTP Group’s customers, employees and suppliers. Macro economy and financial situation Hungary The rapid recovery following the Covid crisis has created capacity bottlenecks in many sectors, which, coupled with rising commodity and energy prices, have significantly increased inflation in advanced economies. In the USA, the rate of inflation has not been at this level since the 1970s. The rapidly rising and increasingly broad- based inflation prompted the Fed to take action and to become the first major central bank to start raising interest rates. This move has significantly strengthened the dollar, and US 10-year yields rose to 4.3%. In the USA, inflation clearly peaked in mid-2022, and has been on a downward trend since then. Inflation also rose rapidly in Europe, where the dramatically growing gas and electricity prices posed the bigger problem. However, inflation also peaked in the euro area by the end of 2022 and has been on a downward trend since October 2022. As the Russia-Ukraine war had a much stronger impact on Europe’s economic outlook, and the labour market was much less tight than in the USA, the ECB was slower to react to the rise in inflation. Still, European short-term interest rates also rose to 2% by the end of 2022. The USA went into a technical recession in the first half of 2022, but this turned out to be temporary, and the US economy resumed growth in the second half-year. Europe’s economies proved more resilient than had been expected to the effects of the Russia-Ukraine war. In the first half of the year, growth benefited from the sectors that recovered after the pandemic, but the currency area also avoided recession in the second half of the year and grew by 3.5% in full year 2022. INTEGRATED ANNUAL REPORT 2022 375 OTP BANK IFRS REPORT (CONSOLIDATED) NOTE 4: MACRO ENVIRONMENT, IMPACT OF ECONOMIC SITUATION ON THE GROUP [continued] Macro economy and financial situation [continued] Hungary [continued] The main factor that affected Hungary’s economy in 2022 was the war in a neighbouring country. Although the Hungarian economy grew by 8.2% year-on-year in the first quarter and by 6.5% in the second, this was largely fuelled by massive one-off transfers at the beginning of 2022. By the second half of the year, however, the economy had lost steam and entered technical recession (two consecutive quarters of economic contraction) by the end of 2022. As a result, the Hungarian economy grew by 4.6% in 2022 as a whole. Inflation, which went beyond 20% by the end of the year, played a significant role in the downturn, significantly eroding real income, and turning its growth negative by the end of 2022. The strong domestic demand at the beginning of the year allowed businesses to pass through the ongoing cost shocks to prices. From the second half of the year, a number of administrative measures (tightening of KATA tax rules, windfall taxes, increasing the public heath product tax, scrapping some price caps, etc.) also boosted inflation. As a consequence, Hungary’s inflation decoupled from the developments in the euro area, where inflation peaked around 10%, and from the CEE region, where it peaked at 15-17%. In Hungary, inflation did not peak in 2022. Given that Hungary is a major net energy importer, the sharp rise in energy prices has significantly worsened the Hungarian economy’s external balance, which put the forint under depreciation pressure. In addition, the continued delay in agreeing on EU funds has increased the risk premium on HUF assets, which also contributed to the forint’s weakening – the MNB could reverse this only by a drastic interest rate hike, when the HUF/EUR was nearing 435. As a result, the effective reference rate rose to 18%. The falling gas prices, and the agreement reached with the EU at the end of 2022 had a benign effect on the HUF’s exchange rate. Falling real incomes and high interest rates have considerably slowed credit market growth. The housing loan market saw the sharpest slowdown: by the end of 2022 (as the Green Home Programme credit line ended), the contracted amount had fallen to half of the level seen in 2021. Despite the rapidly eroding real incomes, household consumption was still relatively buoyant. But this came at a price: households’ ability to save has sharply fallen. Outflows from demand deposits was particularly strong; these amounts flowed into foreign currency deposits and investment fund units. The principles used in the preparation of the Consolidated Statement of Financial Position as at 31 December 2022 in connection with the evaluation of Russian and Ukrainian exposures Going concern principle Russia launched an operation against Ukraine on 24 February 2022, which has not ended even as of the date of these Consolidated Financial Statements. Because of the armed conflict, many countries and the European Union have imposed sanctions against Russia, Russian companies and citizens in several rounds. Russia responded to these sanctions with similar sanctions measures. Armed conflict and international sanctions significantly affect business and economic activity worldwide. Under an unexpected and extremely negative scenario of deconsolidating the Ukrainian entity and writing down the outstanding gross intragroup exposures as well, the effect for the consolidated CET1 ratio would be +1 bp, whereas in the case of Russia the impact would be -71 bps, based on the end of December 2022 numbers. OTP Group’s Ukrainian operation incorporates the Ukrainian bank, as well as the leasing and factoring companies. The country-consolidated Ukrainian total assets represented HUF 1,049 billion at the end of 2022 (3.2% of total consolidated assets), while net loans comprised HUF 414 billion (2.2% of consolidated net loans) and shareholders’ equity HUF 122 billion (3.7% of the consolidated total equity). At the end of 2022 the gross intragroup funding towards the Ukrainian operation represented HUF 84 billion. In 2022 the Ukrainian operation posted an adjusted after-tax loss of HUF 15.9 billion. Regarding the trajectory of the quarterly results, following the loss of HUF 34.4 billion realized in the first quarter, the financial performance of the Ukrainian operation stabilized: in the second quarter around break-even result, then both in the third and the fourth quarter a positive result was achieved. INTEGRATED ANNUAL REPORT 2022 376 OTP BANK IFRS REPORT (CONSOLIDATED) NOTE 4: MACRO ENVIRONMENT, IMPACT OF ECONOMIC SITUATION ON THE GROUP [continued] The principles used in the preparation of the Consolidated Statement of Financial Position as at 31 December 2022 in connection with the evaluation of Russian and Ukrainian exposures [continued] Going concern principle [continued] The total assets of the Group’s Russian operation represented HUF 1,030 billion at the end of 2022 (3.1% of consolidated total assets), while net loans comprised HUF 612 billion (3.3% of consolidated net loans) and shareholders’ equity HUF 306 billion (9.2% of consolidated total equity). As the Russian subsidiary repaid its maturing intragroup loans in the fourth quarter of 2022, the gross intragroup funding towards the Russian operation declined from HUF 75 billion equivalent at the end of 2021 to HUF 10 billion equivalent at the end of 2022 (these figures are practically the same as the net group funding due to the lack of deposits placement by Russia in the Group). The remaining intragroup exposure toward the Russian operation at the end of 2022 was a subordinated loan.The Russian operation posted HUF 42.5 billion adjusted profit in 2022. Within that, HUF 27.2 billion loss was suffered in the first quarter, followed by profitable quarters in the remaining part of the year. In the case of Ukraine and Russia OTP management applies a „going concern” approach, however in Russia the management is still considering all strategic options, though a Russian Presidential decree in October 2022 prohibited the sale of foreign owned banks. Based on the current evaluation of the Bank's management, the Ukrainian-Russian conflict does not have a significant negative impact on the OTP Group's business activities, financial situation, effectiveness of its activities, liquidity, and capital situation. Even after the recognition of the potential losses and write-offs outlined above, the Group's capital adequacy remains above the expected regulatory level. There is no sign of significant uncertainties having been arisen regarding carrying out its business as a going concern. Significant estimates affected by the Russian-Ukrainian conflict during the preparation of these Consolidated Financial Statements During the preparation of these Consolidated Financial Statements, the Group identified the following estimates, which were significantly affected by the Russian-Ukrainian conflict: 1) Evaluation of Russian sovereign exposures (government securities) and related reserves for expected credit losses a) exposures of the Russian subsidiary bank b) exposures of other members of the group (parent company and subsidiaries) 2) Evaluation of Ukrainian sovereign exposures (government securities) and related reserves for expected credit losses a) exposures of the Ukrainian subsidiary bank b) exposures of other members of the group (parent company and subsidiaries) 3) evaluation of derivative transactions denominated in Russian rubles 4) evaluation of derivative transactions denominated in the Ukrainian hryvnia 5) claims against Russian and Ukrainian central banks, provisions for expected credit losses related to Russian and Ukrainian interbank claims and customer loans a) b) the impact of the deterioration of the Russian and Ukrainian macro-environment following direct exposure to the Russian and Ukrainian markets, non-Russian and Ukrainian bank exposures c) exposures of Russian and Ukrainian subsidiary banks 6) evaluation of goodwill 7) deferred tax assets INTEGRATED ANNUAL REPORT 2022 377 OTP BANK IFRS REPORT (CONSOLIDATED) NOTE 4: MACRO ENVIRONMENT, IMPACT OF ECONOMIC SITUATION ON THE GROUP [continued] The principles used in the preparation of the Consolidated Statement of Financial Position as at 31 December 2022 in connection with the evaluation of Russian and Ukrainian exposures [continued] Significant estimates affected by the Russian-Ukrainian conflict during the preparation of these Consolidated Financial Statements [continued] Cash, amounts due from banks and balances with the National Banks Placements with other banks Financial assets at fair value through profit or loss - derivatives Securities at fair value through other comprehensive income Securities at amortized cost Loans at amortized cost Finance lease receivables Associates and other investments Property and equipment Intangible assets and goodwill Right-of-use assets Investment properties Deferred tax assets Other assets TOTAL ASSETS Amounts due to banks, the National Governments, deposits from the National Banks and other banks Russia Reference Gross value Impairment / Depreciation Ukraine Reference Gross value Impairment / Depreciation Reference Gross value Impairment / Depreciation Other countries 5 3 1a 5 7 41,143 248,192 366 22,051 - - - - - - 792,217 (180,364) 5 4 2a 2a 5 - 58 39,583 37,524 19,741 - 20,719 36,237 1,257,831 18,415 - (2) (25,058) (17,927) (10,555) - - 7 (7,378) (241,284) - 48,537 36,835 14 26,601 309,128 373,560 153,090 14,132 9,760 6,311 252 - 13,231 991,451 26,125 - (250) - - (14) (87,860) (24,899) (6,827) (5,897) (3,007) - - (1,097) (129,851) - 1b; 2b 1b; 2b 5 - - - 71,683 50,962 11,311 - - - - - (43,003) (17,635) (6,929) - - 6 40,866 (40,866) - - - - - - - - 174,822 (108,433) - - INTEGRATED ANNUAL REPORT 2022 378 OTP BANK IFRS REPORT (CONSOLIDATED) NOTE 4: MACRO ENVIRONMENT, IMPACT OF ECONOMIC SITUATION ON THE GROUP [continued] The principles used in the preparation of the Consolidated Statement of Financial Position as at 31 December 2022 in connection with the evaluation of Russian and Ukrainian exposures [continued] Significant estimates affected by the Russian-Ukrainian conflict during the preparation of these Consolidated Financial Statements [continued] During the evaluation of these assets, the Group applied the evaluation principles detailed below, which evaluation contains significant estimates on the part of the Management. The results of the estimates may vary significantly depending on the development of the situation in the Russian-Ukrainian conflict. References 1a. Evaluation of Russian sovereign exposures and related reserves for expected credit losses - exposures of the Russian subsidiary bank Within Russia, Russian government securities are marketable, and their repayment is expected to take place in accordance with the original conditions. The fair value calculation of securities is based on market prices available and observable on local trading platforms Due to the increased credit risk, the Bank classified these securities in the Stage 2 category. 1b. Evaluation of Russian sovereign exposures and related reserves for expected credit losses - other exposures of the group Outside of Russia, the marketability of Russian government securities is significantly limited due to sanctions and capital market participants turning away from Russian securities. The credit rating of the Russian state was withdrawn in 2022, the Group classifies the Russian state as non-performing, and in accordance with this, it assigned the affected exposures to the Stage 3 category. The Russian state not only recognizes its obligation and has the necessary financial reserves, but would also be willing to pay, so the increased loss potential is caused by non-traditional credit risks. In the case of a portfolio valued at fair value against other comprehensive income, the book value is determined based on the level 3 prices of IFRS13. Cash-flow estimation, current market benchmarks (provided by Bloomberg), liquidity and non-credit risk considerations were taken into account in fair value calculation. 2a. Valuation of Ukrainian sovereign exposures and related reserves for expected credit losses - exposures of the Ukrainian subsidiary bank The marketability of local government securities and the liquidity of the market are limited in Ukraine Ukrainian government securities can only be found in the books of the Ukrainian subsidiary, due to the increased credit risk, these exposures are classified as Stage2. In the case of a portfolio valued at fair value against other comprehensive results, the book value is determined based on the level 3 prices of IFRS13. During the actual evaluation, the expected cash flow is discounted using yield curves observed based on current market benchmarks (published by the National Bank of Ukraine). 2b. Valuation of Ukrainian sovereign exposures and related reserves for expected credit losses - other exposures of the group Ukrainian government securities are exclusively in the books of the Ukrainian subsidiary. 3. Valuation of Russian derivative transactions Similar to the bond market, in 2022 the money market inside and outside Russia will also be separated. In the case of futures contracts concluded with local partners on the Russian market, the evaluation is carried out using yield curves available and observable on the local market. In cases where one of the partners is not Russian, the evaluation is done using yield curves available and observable on the international market. In 2022, there was one case of non-performance, the impact of which was HUF 13.8 billion. INTEGRATED ANNUAL REPORT 2022 379 OTP BANK IFRS REPORT (CONSOLIDATED) NOTE 4: MACRO ENVIRONMENT, IMPACT OF ECONOMIC SITUATION ON THE GROUP [continued] The principles used in the preparation of the Consolidated Statement of Financial Position as at 31 December 2022 in connection with the evaluation of Russian and Ukrainian exposures [continued] Significant estimates affected by the Russian-Ukrainian conflict during the preparation of these Consolidated Financial Statements [continued] References [continued] 4. Valuation of Ukrainian derivatives Similar to the bond market, in 2022 the liquidity and number of transactions in the Ukrainian money market were limited. The Treasury turnover of the Ukrainian bank is low, and a significant part of the derivative transactions are related to the bank's risk management and concluded with the parent company. During the actual evaluation, the expected cash-flow is discounted using yield curves observed based on current market benchmarks (published by the National Bank of Ukraine). 5. Claims against Russian and Ukrainian central banks, provisions for expected credit losses related to Russian and Ukrainian interbank claims and customer loans As part of the continuous monitoring activity, OTP Group has explored and analyzed the secondary and tertiary negative effects of the war in the corporate segment for Group members outside of Russia and Ukraine, including the effects of the current sanctions policy. In the case of the affected customers, if the increased risk was substantiated, they were classified in the Stage 2 category, while in the case of non-performance, the Group classified the given exposures in the Stage 3 rating category. In the case of Group members in Russia, the impact of the deteriorating economic environment compared to previous years was taken into account when determining the expected loss, however, the Bank does not expect any further substantial deterioration of the economic environment. As a result of the cessation of active corporate lending, the exposure of corporate loans in rubles decreased by 75% in 2022. The retail credit market started to pick up again from the second half of the year, although the dynamics of lending fell short of the similar period of the previous year. In the case of Ukrainian Group members, the proportion of customers with increased risk (Stage2) and non- performing (Stage3) increased significantly in 2022. When determining the expected loss, the drastically deteriorating external environment in 2022 was taken into account, compared to which the Bank does not expect any further significant deterioration in 2023. The identification of the increased risk – given the special situation – extends to regionally different war activity. In addition, the territorial distribution of exposures was also taken into account when evaluating the expected loss, in the areas directly and indirectly affected by the war, the Bank does not expect a significant return for non-performing customers, regardless of economic trends. Adjusted for exchange rates, the stock of residential loans due in 2022 (Stage 1+2) fell by approximately half. New corporate lending is predominantly limited to the refinancing of existing frameworks, the corporate loan portfolio decreased by 20% and the leasing portfolio by 28% adjusted for exchange rates last year. In the residential segment, the Bank's activity dropped to a fraction from the end of February, and in the second half of the year, there was already a small recovery in commodity lending. 6. Evaluation of goodwill In connection with the involvement in the Russian-Ukrainian conflict, as a result of the company value review, the Group considered it necessary to fully write off the existing goodwill in the case of the Russian subsidiary bank in the first quarter of 2022, the value of which as at 31 December 2021 was HUF 40.9 billion. The effect of goodwill write-off on the result was HUF 67.7 billion, and a HUF 26.8 billion loss was accounted for against equity. In the case of Ukraine, there was no goodwill write-off. Based on current experience, the Group takes into account the macroeconomic effects of the current geopolitical situation in the mid- to long-term when determining the impairment of investments in the case of countries affected by the conflict. In the case of Russian and Ukrainian operations, we currently do not consider it likely that the estimated investment value before the conflict (2021) will be reached during the 3-year explicit period. INTEGRATED ANNUAL REPORT 2022 380 OTP BANK IFRS REPORT (CONSOLIDATED) NOTE 4: MACRO ENVIRONMENT, IMPACT OF ECONOMIC SITUATION ON THE GROUP [continued] The principles used in the preparation of the Consolidated Statement of Financial Position as at 31 December 2022 in connection with the evaluation of Russian and Ukrainian exposures [continued] Significant estimates affected by the Russian-Ukrainian conflict during the preparation of these Consolidated Financial Statements [continued] References [continued] 7. Deferred tax Due to the uncertainty of the expected return, the Group did not recognize deferred tax assets in Ukraine, while in Russia, the Group recognized HUF 20.7 billion in deferred tax assets. There is no limit to unused tax credits in Russia. In addition, if the bank's taxable loss were to increase (if the impairment calculated according to local rules approached the higher level of impairment according to IFRS), the difference between the settlement and the tax loss would decrease, thus reducing the deferred tax asset. As a result, the bank was able to utilize the temporary deferred tax asset both in the expected profitable operation and in a possible loss scenario. Summary of economic policy measures made and other relevant regulatory changes in the period under review In the section below, the measures and developments which have been made since the beginning of 2022, and – in OTP Bank’s view – are relevant and have materially influenced / can materially influence the operation of the Group members. OTP Bank excludes any liability for the completeness and accuracy of the measures presented herein. Hungary • On 5 April 2022 the National Bank of Hungary raised the available amount under the Green Home Programme by an additional HUF 100 billion, up from the originally announced HUF 200 billion. • Pursuant to Government Decree No. 150/2022 published on 14 April 2022, effective from 29 April the intermediary and other fees paid by the State to commercial banks were amended in the case of the Housing Subsidy for Families (CSOK), the VAT refund subsidy for newly built homes, the repayment by the State of housing loan taken out by families with children, and the baby loans. These fees are now set as absolute amounts, instead of the previous percentage terms. Furthermore, the interest subsidy paid by the state was reduced by one percentage point in the case of baby loans requested after 29 April. • According to the press release made by the National Bank of Hungary on 30 June 2022, the counter-cyclical capital buffer rate will be increased, for the first time since its introduction 6 years ago, to 0.5% effective from 1 July 2023. • The baby loan programme which was originally meant to expire by the end of 2022 was extended by 2 years, till the end of 2024. Interest rate cap For the period between 1 January and 30 June 2022 the Hungarian Government introduced an interest rate cap for variable-rate retail mortgage loans, and with its decision announced on 18 February for housing purposes financial leasing contracts, too. Accordingly, the affected exposures’ reference rate cannot be higher than the relevant contractual reference rate as at 27 October 2021. The modification loss related to the interest rate cap for variable rate mortgage loans announced was recognized in the Bank’s 2021 financial accounts. The extension of the interest rate cap to housing purposes financial leasing contracts did not have a significant negative effect. Pursuant to Government Decree No. 215/2022 (issued on 17 June) the Government extended the interest rate cap for variable-rate retail mortgage loans by an additional 6 months, i.e. until 31 December 2022. The expected one- off effect of the extension of the interest rate cap amounted to -HUF 10.1 billion (after tax) and was booked in the second quarter of 2022. INTEGRATED ANNUAL REPORT 2022 381 OTP BANK IFRS REPORT (CONSOLIDATED) NOTE 4: MACRO ENVIRONMENT, IMPACT OF ECONOMIC SITUATION ON THE GROUP [continued] Interest rate cap [continued] The details of the extension of the interest rate cap scheme were revealed on 14 October 2022. Firstly, the interest rate cap was further extended by 6 months, until the end of June 2023. Secondly, from 1 November 2022 the provisions of the interest rate cap must applied to the market-based mortgages with up to 5 years interest rate repricing period, too. On 22 October 2022 the Government announced that starting from 15 November until 30 June 2023, the reference rate of certain MSE loans will also be capped, as set out by Government Decree 415/2022 (X. 26.) published on 26 October. Accordingly, the provisions shall be applied to HUF denominated, non-subsidized, floating rate loans to micro and small enterprises and financial lease contracts, excluding overdraft loan agreements. In this period, the reference rate of these exposures cannot be higher than the relevant reference rate as specified in the contract as at 28 June 2022 (on that day the 3M BUBOR stood at 7.77%). The financial burden of the MSE rate cap must be shouldered by the banks. The cost of the rate cap scheme is borne by the banks. The expected negative after tax effect of the measures taken in October 2022 amounted to HUF 26.4 billion and was accounted for in the fourth quarter of 2022 in one sum. Moratorium, one-off effect In Hungary the first phase of the moratorium on loan payments was effective from 19 March 2020 to 31 December 2020. At the end of 2020 the moratorium was extended in unchanged form for the period between 1 January 2021 and 30 June 2021. Furthermore, according to Government Decree No. 317/2021. (VI. 9.) released on 9 June 2021 the payment moratorium was extended with unchanged conditions until 30 September 2021. Pursuant to Government Decree 536/2021. (IX. 15.) published on 15 September, the Government decided to extend the debt repayment moratorium: the blanket moratorium was extended by an additional month, until the end of October, in an unchanged form. Furthermore, from the beginning of November 2021 until 30 June 2022 only the eligible borrowers can participate in the moratorium provided that they submitted a request to their banks about their intention to stay. Similarly, with its Government Decree No. 216/2022 published on 17 June, the Government further extended the expiry of the moratorium, until the end of 2022. Eligible clients had to notify their bank about their intention to participate in the payment holiday until the end of July 2022. The general payment holiday expired at the end of 2022. Starting from September 2022 to the end of 2023, due to the severe draught, agricultural companies can enjoy a payment moratorium on their working capital and investment loans. Eligible borrowers can decide whether to join the scheme or not. At the end of 2022, HUF 41 billion worth of loans were subject to the moratorium for agricultural companies, making up 0.6% of OTP Core’s total gross loan volume. During the term of the moratorium OTP Bank accrues the unpaid interest in its statement of recognized income, amongst the revenues. At the same time, due to the fact that interest cannot be charged on the unpaid interest, and the unpaid interest will be repaid later, in the course of 2020, 2021 and 2022 altogether HUF 44.1 billion one-off loss emerged in Hungary (after tax). Financial assets modified during the period related to moratorium in the Group for the year ended 31 December 2022 (in HUF mn) Modification due to prolongation of deadline of moratorium from 30 June until 31 July 2022 Gross carrying amount before modification Loss allowance before modification Net amortised cost before modification Modification loss Net amortised cost after modification Group 159,850 (31,718) 128,132 (471) 127,661 INTEGRATED ANNUAL REPORT 2022 382 OTP BANK IFRS REPORT (CONSOLIDATED) NOTE 4: MACRO ENVIRONMENT, IMPACT OF ECONOMIC SITUATION ON THE GROUP [continued] Financial assets modified during the period related to moratorium in the Group for the year ended 31 December 2022 (in HUF mn) [continued] Modification due to prolongation of interest rate cap till 30 June 2022 Gross carrying amount before modification Loss allowance before modification Net amortised cost before modification Modification loss Net amortised cost after modification Group 289,630 (7,771) 281,859 (11,144) 270,715 Modification due to prolongation of deadline of moratorium till 30 September 2022 Gross carrying amount before modification Loss allowance before modification Net amortised cost before modification Modification loss Net amortised cost after modification Group 1,053 (108) 945 (5) 940 Modification due to moratorium related to agriculture and prolongation of deadline of existing moratorium till 30 September 2022 Gross carrying amount before modification Loss allowance before modification Net amortised cost before modification Modification loss Net amortised cost after modification Group 152,051 (24,910) 127,141 (2,122) 125,019 Modification due to prolongation of interest rate cap till 30 November 2022 Gross carrying amount before modification Loss allowance before modification Net amortised cost before modification Modification loss Net amortised cost after modification Group 154,421 (6,184) 148,237 (536) 147,701 Modification due to scope extension (mortgage loans with 5-year fixing without subsidy) and prolongation of the existing interest rate cap till 31 December 2022 Gross carrying amount before modification Loss allowance before modification Net amortised cost before modification Modification loss Net amortised cost after modification Group 422,201 (12,604) 409,597 (22,860) 386,737 INTEGRATED ANNUAL REPORT 2022 383 OTP BANK IFRS REPORT (CONSOLIDATED) NOTE 4: MACRO ENVIRONMENT, IMPACT OF ECONOMIC SITUATION ON THE GROUP [continued] Financial assets modified during the period related to moratorium in the Group for the year ended 31 December 2021 (in HUF mn) Modification due to prolongation of deadline of covid moratoria until 30 September: Gross carrying amount before modification Loss allowance before modification Net amortised cost before modification Modification loss due to covid moratoria Net amortised cost after modification Group 1,175,230 (66,066) 1,109,164 (6,620) 1,102,544 Modification due to prolongation of deadline of covid moratoria until 31 October: Gross carrying amount before modification Loss allowance before modification Net amortised cost before modification Modification loss due to covid moratoria Net amortised cost after modification Group 1,166,115 (69,415) 1,096,700 (2,104) 1,094,596 In the case of credit card and overdraft loans interest charged during the moratoria period should be refunded to the debtors in amount determined as a difference between the charged interest and a premoratoria personal loan interest at 11,99%. The Bank has managed this government measure as loan agreement modification in the financial statements. Gross carrying amount before modification Loss allowance before modification Net amortised cost before modification Modification loss due to covid moratoria Net amortised cost after modification Group 57,892 (9,234) 48,658 (1,983) 46,675 Modification due to prolongation of deadline of covid moratoria until 30 June 2022: Gross carrying amount before modification Loss allowance before modification Net amortised cost before modification Modification loss due to covid moratoria Net amortised cost after modification Group 113,728 (25,428) 88,300 (2,838) 85,462 Modification due to temporarily fixing of loan with variable interest rate: On 24 December 2021 new regulation was issued on fixing of retail loan product’s interest, under that interest rates of mortgage loans with variable interest shall be fixed at reference rates of 27 October 2021, predictably till 30 June 2022. Gross carrying amount before modification Loss allowance before modification Net amortised cost before modification Modification loss due to covid moratoria Net amortised cost after modification Group 321,323 (9,317) 312,006 (3,397) 308,609 INTEGRATED ANNUAL REPORT 2022 384 OTP BANK NOTE 5: CASH, AMOUNTS DUE FROM BANKS AND BALANCES WITH THE NATIONAL BANKS (in HUF mn) IFRS REPORT (CONSOLIDATED) Cash on hand In HUF In foreign currency Amounts due from banks and balances with the National Banks Within one year In HUF In foreign currency Over one year In HUF In foreign currency Loss allowance on amounts due from bank and balances with the National Banks Total Compulsory reserve set by the National Banks Cash and cash equivalents 2022 92,526 582,950 675,476 2021 87,489 409,045 496,534 2022 2021 732,956 2,814,663 3,547,619 83,540 1,977,069 2,060,609 - - - - - - (1,703) (1,108) 4,221,392 2,556,035 (1,623,704) (854,474) 2,597,688 1,701,561 Foreign subsidiary banks within the Group have to comply with country specific regulation of local National Banks. Each country within the Group has its own regulation for compulsory reserve calculation and maintenance. Based on those banks are obliged to place compulsory reserve at their National Bank in a specified percentage of their liabilities considered in compulsory reserve calculation. An analysis of the change in the loss allowance on amounts from banks and balances with the National Banks is as follows: Balance as at 1 January Loss allowance for the period Release of loss allowance for the period Use of loss allowance for the period Foreign currency translation difference Closing balance 2022 1,108 8,072 (7,697) - 220 1,703 2021 - 952 - - 156 1,108 INTEGRATED ANNUAL REPORT 2022 385 OTP BANK IFRS REPORT (CONSOLIDATED) NOTE 6: PLACEMENTS WITH OTHER BANKS (in HUF mn) Within one year In HUF In foreign currency Over one year In HUF In foreign currency Loss allowance on placements Total 2022 2021 681,892 447,648 1,129,540 199,056 26,323 225,379 (3,837) 851,053 523,205 1,374,258 162,774 50,823 213,597 (2,994) 1,351,082 1,584,861 An analysis of the change in the loss allowance on placements with other banks is as follows: Balance as at 1 January Loss allowance for the period Release of loss allowance for the period Use of loss allowance for the period Foreign currency translation difference Closing balance Interest conditions of placements with other banks: Interest rates on placements with other banks denominated in HUF Interest rates on placements with other banks denominated in foreign currency Average interest rates on placements with other banks (%) 2022 2,994 38,314 (38,378) (100) 1,007 3,837 2021 1,489 25,133 (23,613) (112) 97 2,994 2022 2021 0.00% - 25.70% (1.50)% - 5.90% (1.5)% - 13.29% (5.00)% - 29.00% 2022 11.02% 2021 1.52% INTEGRATED ANNUAL REPORT 2022 386 OTP BANK IFRS REPORT (CONSOLIDATED) NOTE 7: REPO RECEIVABLES (in HUF mn) Within one year In HUF In foreign currency Over one year In HUF In foreign currency Loss allowance on repo receivables Total An analysis of the change in the loss allowance on repo receivables is as follows: Balance as at 1 January Loss allowance for the period Release of loss allowance for the period Use of loss allowance Foreign currency translation difference Closing balance Interest conditions of repo receivables (%): 2022 41,250 - 41,250 - - - (241) 41,009 2022 290 4,744 (4,794) - 1 241 2021 33,710 27,632 61,342 - - - (290) 61,052 2021 292 1,112 (1,124) - 10 290 Interest rates on repo receivables denominated in HUF Interest rates on repo receivables denominated in foreign currency 2022 2021 10.70% - 18.00% 3.04% - 3.20 % - (0.58)% - 9.62% INTEGRATED ANNUAL REPORT 2022 387 OTP BANK IFRS REPORT (CONSOLIDATED) NOTE 8: FINANCIAL ASSETS AT FAIR VALUE THROUGH PROFIT OR LOSS (in HUF mn) Securities held for trading Government bonds Equity instruments and fund units Corporate bonds Discounted Treasury bills Mortgage bonds Other interest-bearing securities Other non-interest-bearing securities Non-trading securities mandatorily at fair value through profit or loss Equity instruments, shares and open-ended fund units Bonds Debt securities designated at fair value through profit or loss Total Positive fair value of derivative financial assets held for trading Foreign exchange swaps held for trading Interest rate swaps held for trading Commodity swaps CCIRS and mark-to-market CCIRS held-for-trading 1 Foreign exchange forward contracts held for trading Held-for-trading option contracts Held-for-trading forward security agreement Other derivative transactions held for trading2 Total Total 1 CCIRS: Cross Currency Interest Rate Swaps (See Note 2.6.3.) 2 Other category includes: fx spot, equity swaps, option and index futures. An analysis of securities held for trading portfolio by currency (%): Denominated in HUF Denominated in foreign currency Total 2022 78,897 385 119 22,896 72 1,628 753 104,750 49,746 5,409 55,155 2021 97,531 1,173 740 923 101 1,347 1,695 103,510 44,894 8,509 53,403 - - 159,905 156,913 2022 79,395 127,230 33,693 20,512 13,085 2,122 13 432 276,482 436,387 2021 38,728 59,504 51,523 11,758 10,790 1,285 - 10,896 184,484 341,397 2022 81.47% 18.53% 100.0% 2021 30.46% 69.54% 100.0% INTEGRATED ANNUAL REPORT 2022 388 OTP BANK NOTE 8: FINANCIAL ASSETS AT FAIR VALUE THROUGH PROFIT OR LOSS (in HUF mn) [continued] IFRS REPORT (CONSOLIDATED) An analysis of government bond portfolio by currency (%): Denominated in HUF Denominated in foreign currency Total Interest conditions of held for trading securities (%): Interest rates on securities held for trading denominated in HUF Interest rates on securities held for trading denominated in foreign currency 2022 2021 78.42% 21.58% 100.00% 28.31% 71.69% 100.00% 2022 2021 0.00% - 16.69% 0.00% - 6.75% 0.00% - 7.63% 0.00% - 9.57% Interest conditions and the remaining maturities of securities held for trading can be analysed as follows: Within one year With variable interest With fixed interest Over one year With variable interest With fixed interest Non-interest-bearing securities Total Profit from associates from shares measured at fair value through profit or loss 2022 3,041 29,025 32,066 9,535 62,011 71,546 1,138 2021 111 44,011 44,122 1,544 54,976 56,520 2,868 104,750 103,510 2022 12,216 2021 3,893 An analysis of non-trading securities mandatorily measured at fair value through profit or loss portfolio by currency (%): Denominated in HUF Denominated in foreign currency Total 2022 2021 60.69% 39.31% 100.00% 57.11% 42.89% 100.00% 2022 2021 Interest rates on non-trading securities mandatorily measured at fair value through profit or loss 0.00% - 0.00% 0.00% - 0.00% INTEGRATED ANNUAL REPORT 2022 389 OTP BANK NOTE 9: SECURITIES AT FAIR VALUE THROUGH OTHER COMPREHENSIVE INCOME (in HUF mn) IFRS REPORT (CONSOLIDATED) Securities at fair value through other comprehensive income Government bonds Corporate bonds Listed securities: In HUF In foreign currency Non-listed securities: In HUF In foreign currency Mortgage bonds Discounted Treasury bills Interest bearing treasury bills Securities issued by the National Bank of Hungary Other securities Total Non-trading equity instruments to be measured at fair value through other comprehensive income Listed securities: In HUF In foreign currency Non-listed securities: In HUF In foreign currency 2022 2021 1,301,179 82,651 - 13,626 13,626 14,304 54,721 69,025 54,553 - 182,726 74,867 3,470 1,699,446 1,765,172 88,519 2,896 51,882 54,778 15,487 18,254 33,741 63,072 96,625 63,115 109,774 3,257 2,189,534 2022 2021 - 11,233 11,233 403 28,521 28,924 40,157 - 8,416 8,416 403 26,157 26,560 34,976 Total 1,739,603 2,224,510 An analysis of securities at fair value through other comprehensive income by currency (%): Denominated in HUF Denominated in foreign currency Total 2022 2021 36.47% 63.53% 100.00% 32.74% 67.26% 100.00% INTEGRATED ANNUAL REPORT 2022 390 OTP BANK IFRS REPORT (CONSOLIDATED) NOTE 9: SECURITIES AT FAIR VALUE THROUGH OTHER COMPREHENSIVE INCOME (in HUF mn) [continued] Detailed information of the non-trading equity instruments to be measured at fair value through other comprehensive income: Strategic investments closely related to banking actitvity Fair value Dividend income from instruments held at the reporting date Derecognition Fair value of derecognized equity instrument, fund units Cumulative gain / loss on disposal transferred to retained earnings Other strategic investments Fair value Dividend income from instruments held at the reporting date Derecognition Cumulative gain / loss on disposal transferred to retained earnings Total Total fair values Dividend income from instruments held at the reporting date Fair value of derecognized equity instrument, fund units Cumulative gain / loss on disposal transferred to retained earnings 2022 31,873 1,120 - - 8,284 59 - 40,157 1,179 - - 2021 29,320 438 65 29 5,656 29 196 34,976 467 65 225 During the year ended 31 December 2022 there wasn’t any sale transaction regarding equity instruments designated to measure at fair value through other comprehensive income in the Group while during the year ended 31 December 2021 the Group sold HUF 65 million equity instruments designated to measure at fair value through other comprehensive income An analysis of government bonds by currency (%): Denominated in HUF Denominated in foreign currency Total 2022 2021 23.64% 76.36% 100.00% 24.29% 75.71% 100.00% Interest conditions of the security portfolio at fair value through other comprehensive income are as follows (%): Interest rates on securities at fair value through other comprehensive income denominated in HUF Interest rates on securities at fair value through other comprehensive income denominated in foreign currency Average interest rates securities at fair value through other comprehensive income denominated in HUF (%) Average interest rates on securities at fair value through other comprehensive income denominated in foreign currency (%) 2022 2021 1.50% - 15.11% 1.25% - 7.00% 0.00% - 18.24% 0.00% - 17.25% 2022 3.31% 2021 2.00% 2.55% 2.51% INTEGRATED ANNUAL REPORT 2022 391 OTP BANK NOTE 9: SECURITIES AT FAIR VALUE THROUGH OTHER COMPREHENSIVE INCOME (in HUF mn) [continued] IFRS REPORT (CONSOLIDATED) Interest conditions and the remaining maturities of securities at fair value through other comprehensive income can be analysed as follows: Within one year With variable interest With fixed interest Over one year With variable interest With fixed interest Non-interest-bearing securities Total Certain securities are hedged against interest rate risk. See Note 37.4. 2022 15,124 507,888 523,012 28,523 1,147,911 1,176,434 2021 1,091 522,939 524,030 51,211 1,614,293 1,665,504 40,157 34,976 1,739,603 2,224,510 INTEGRATED ANNUAL REPORT 2022 392 OTP BANK IFRS REPORT (CONSOLIDATED) NOTE 10: SECURITIES AT AMORTIZED COST (in HUF mn) Government bonds Corporate bonds Bonds of Hungarian National Bank Discounted Treasury bills Mortgage bonds Interest bearing Treasury bills Other securities 2022 2021 4,375,085 250,538 177,679 19,539 24,586 4,977 82,583 4,934,987 3,651,508 172,526 - 15,705 24,356 - 36,353 3,900,448 Loss allowance on securities at amortized cost (43,049) (9,113) Total 4,891,938 3,891,335 Interest conditions and the remaining maturities of securities at amortized cost can be analysed as follows: Within one year With variable interest With fixed interest Over one year With variable interest With fixed interest 2022 159 951,773 951,932 25,753 3,957,302 3,983,055 2021 8,101 480,296 488,397 5,122 3,406,929 3,412,051 Total 4,934,987 3,900,448 An analysis of securities at amortized cost by currency (%): Denominated in HUF Denominated in foreign currency Total Interest conditions of securities at amortized cost (%): Interest rates of securities at amortized cost with variable interest Interest rates of securities at amortized cost with fixed interest Average interest rates on securities at amortized cost denominated in HUF (%) 2022 2021 63.50% 36.50% 100.00% 75.42% 24.58% 100.00% 2022 2021 0.75% - 17.74% 1.20% - 2.08% 0.00% - 23.00% 0.00% - 9.00% 2022 3.31% 2021 2.46% INTEGRATED ANNUAL REPORT 2022 393 OTP BANK IFRS REPORT (CONSOLIDATED) NOTE 10: SECURITIES AT AMORTIZED COST (in HUF mn) [continued] An analysis of the change in the loss allowance on securities at amortized cost is as follows: Balance as at 1 January Opening change due to modification Balance as at 1 January after modification Loss allowance for the period Release of loss allowance Use of loss allowance Foreign currency translation difference Closing balance 2022 9,113 - 9,113 37,104 (5,603) - 2,435 43,049 2021 5,657 1,281 6,938 6,634 (3,621) (992) 154 9,113 INTEGRATED ANNUAL REPORT 2022 394 OTP BANK IFRS REPORT (CONSOLIDATED) NOTE 11: LOANS AT AMORTIZED COST AND AT FAIR VALUE (in HUF mn) Loans at amortized cost Within one year In HUF In foreign currency Over one year In HUF In foreign currency Loss allowance on loans Total An analysis of the gross loan portfolio at amortized cost by currency (%): In HUF In foreign currency Total Interest rates of the loan portfolio at amortized cost are as follows: 2022 2021 1,422,663 3,672,023 5,094,686 2,425,793 9,540,339 11,966,132 1,243,635 2,901,682 4,145,317 2,359,485 7,840,375 10,199,860 17,060,818 14,345,177 (966,360) (851,994) 16,094,458 13,493,183 2022 2021 22.56% 77.44% 100.00% 25.12% 74.88% 100.00% 2022 2021 Loans at amortized cost denominated in HUF1 Loans at amortized cost denominated in foreign currency2 0.00% - 43.70% (0.10)% - 90.00% 0.00% - 52.00% (0.59)% - 90.00% 1 The highest interest rate relates to HUF loan is overdraft loan, both in the current and in the previous years. 2 The highest interest rate relates to loan in foreign currency regarding POS services in Russia both in the current and in the previous years. Average interest rates on loans at amortized cost denominated in HUF (%) Average interest rates on loans at amortized cost denominated in foreign currency (%) 2022 8.65% 5.47% 2021 6.23% 4.79% The amount of those loans which were written-off in the current year but they are still subject to enforcement activity to be collected is still going on were HUF 117,357 million and HUF 104,940 million as at 31 December 2022 and 2021, respectively. INTEGRATED ANNUAL REPORT 2022 395 OTP BANK IFRS REPORT (CONSOLIDATED) NOTE 11: LOANS AT AMORTIZED COST AND AT FAIR VALUE (in HUF mn) [continued] An analysis of the change in the loss allowance on loans is as follows: 2022 2021 Balance as at 1 January Opening change due to modification Balance as at 1 January after modification Loss allowance for the period Release of loss allowance Loss allowance in the current period from this: effect of change in parameters used for loss allowance calculation Use of loss allowance Partial write-off 1 Unwinding Foreign currency translation difference Closing balance 1 See details in Note 2.11. Movement in loss allowance on loans and placements is summarized as below: Loss allowance on placements and gains from write-off and sale of placements Loss allowance on loans and gains from write-off and sale of loans Total 2 2 See details in Note 31. Loans mandatorily at fair value through profit or loss Within one year In HUF In foreign currency Over one year In HUF In foreign currency Total 851,994 - 851,994 676,389 (469,929) 206,460 10,276 (92,004) (67,651) - 67,561 966,360 2022 (39) 114,163 114,124 829,543 (1,281) 828,262 546,284 (464,888) 81,396 (60,531) (66,784) (17,936) 345 26,711 851,994 2021 1,664 34,776 36,440 2022 2021 70,883 - 70,883 1,176,531 - 1,176,531 61,537 - 61,537 1,006,293 281 1,006,574 1,247,414 1,068,111 INTEGRATED ANNUAL REPORT 2022 396 OTP BANK IFRS REPORT (CONSOLIDATED) NOTE 11: LOANS AT AMORTIZED COST AND AT FAIR VALUE (in HUF mn) [continued] An analysis of the loan portfolio mandatorily at fair value through profit or loss by currency (%): In HUF In foreign currency Total 2022 2021 100.00% 0.00% 100.00% 99.17% 0.83% 100.00% Interest rates of the loan portfolio mandatorily at fair value through profit or loss are as follows (%): Interest rates on loans denominated in HUF Interest rates on loans denominated in foreign currency 2022 2021 1.12% - 18.26% 1.21% - 10.83% - 4.00% - 4.00% Average interest rates on loan portfolio at fair value through profit or loss denominated in HUF (%) Average interest rates on loan portfolio at fair value through profit or loss denominated in foreign currency (%) 2022 4.55% 0.04% 2021 4.17% 1.82% INTEGRATED ANNUAL REPORT 2022 397 OTP BANK IFRS REPORT (CONSOLIDATED) NOTE 12: ASSOCIATES AND OTHER INVESTMENTS (in HUF mn) Investments Investments in associates (non-listed) Other investments (non-listed) Impairment on investments Total An analysis of the change in the impairment on investments is as follows: Balance as at 1 January Impairment for the period Release of impairment for the period Modification due to merge Use of impairment Foreign currency translation difference Closing balance 2022 29,010 56,919 85,929 (12,080) 73,849 2022 12,514 1,312 (411) (1,238) - (97) 12,080 2021 42,409 37,327 79,736 (12,514) 67,222 2021 5,864 7,266 (626) 28 - (18) 12,514 INTEGRATED ANNUAL REPORT 2022 398 OTP BANK IFRS REPORT (CONSOLIDATED) NOTE 13: PROPERTY, EQUIPMENT AND INTANGIBLE ASSETS (in HUF mn) There are different kinds of tangible and intangible assets held by the Group. In the followings there are presented reasons of the changes from opening values to closing ones in the gross values, the accumulated depreciation and amortization and in the impairment of the tangible and intangible assets in the Group. Here can be found information about the fair values of the tangible assets and gross amounts of those assets which were fully depreciated but which are still in use. Carrying amount of the temporarily idle properties was HUF 3,466 million and HUF 3,057 million as at 31 December 2022 and 31 December 2021, respectively. There were no restrictions on title and properties, plants or equipment pledged as security for liabilities as at 31 December 2022 and 2021. As at 31 December 2022 and 2021 the amount of contractual commitments for the acquisition of tangible and intangible assets was HUF 21,116 million and HUF 1,595 million, respectively. Impairment for the properties in the current period was needed as a result of the valuation performed by using the comparative value method (market analogy method) with direct comparison to the market price of other similar properties. Actual market transactions were used based on the 6-month period prior to the valuation date where the market price of the analogous property is adjusted by an expert coefficient for market adaptation (“ECMA”). Usually this range is from -25% to +25% and reflects the availability of sufficient market information for similar items but at these properties ECMA exceeded this range where the circumstances were exceptional although by decision of the appraiser it was used only for unique properties with characteristics similar to the appraised ones, for which no sufficient market analogues are available. The price was adjusted by coefficients reflecting the area, location, size and structure of the property, as well as a weighing factor reflecting the weight of the selected market analogies in the determined fair value. The Bank decided that the recoverable amount of goodwill is determined based on fair value less cost of disposal. When the Bank prepares goodwill impairment tests of the subsidiaries, the two methods which are used based on discounted cash-flow calculation that shows the same result; however, they represent different economical logics. Based on the internal regulation of the Bank as at 31 December 2021 impairment test was prepared where a three- year cash-flow model was applied with an explicit period between 2022-2024. The basis for the estimation was the actual data of May 2022 and based on the prepared medium-term (2022-2024) forecasts. When the Bank prepared the calculations for the period 2022-2024, it considered the actual worldwide economic situations, the expected economic growth for the following years, their possible effects on the financial sector, the plans for growing which result from these, and the expected changes of the mentioned factors. Present value calculation with the Free Cash-Flow method The Bank calculated the expected cash-flow for the given period based on the expected after-tax profit of the companies. The calculation is highly sensitive to the level of discount rate and growth rate used. As discount factor the Bank uses a zero coupon yield curve derived by the Headquarter Asse-Liability Management department. This zero coupon curve is estimated for each related countries, based on the countries’ issued bonds and segmented by the issuances’ currencies. By subsidiaries where the yield curves were not available (Ukraine) the daily Overnight deposit yield was used as a benchmark, provided by National Bank of Ukraine as currently the only available proxy for the hryvnia rate. The Bank calculated risk premiums on the basis of information from the country risk premiums that are published by Aswath Damodaran – New York STERN University, according to the Bank’s assumption the risk-free interest rate includes the country-dependent risks in an implicit way. When the subsidiary owns subordinated debt, the discount rate is calculated as a weighted average of the expected return on equity presented previously and the subordinated debt’s interest rate. At the end of the calculation, the value of subordinated debt is being subtracted from the valuations’ result. The growth rate in the explicit period is the growth rate of the profit after tax adjusted by the interest rate of the cash and subordinated loans. The supposed growth rates for the periods of residual values reflect the long-term economic expectations in case of every country. The values of the subsidiaries in the FCF method were then calculated as the sum of the discounted cash-flows of the explicit period, the present value of the terminal values and the initial free capital assuming an effective capital structure. Summary of the impairment test for the year ended 31 December 2022 and 2021 Based on the valuations of the subsidiaries for the year ended 31 December 2022 67,715 million HUF goodwill impairment was needed to be recorded by the Group for JSC “OTP Bank” (Russia) while for the year ended 31 December 2021 no goodwill impairment was needed to be recorded by the Group. INTEGRATED ANNUAL REPORT 2022 399 OTP BANK IFRS REPORT (CONSOLIDATED) NOTE 13: PROPERTY, EQUIPMENT AND INTANGIBLE ASSETS (in HUF mn) [continued] For the year ended 31 December 2022 Cost Balance as at 1 January Increase due to acquisition Additions Foreign currency translation differences Disposals Closing balance Intangible assets Goodwill Property Machinery and office equipment Vehicle Construction in progress Tangible assets subject to operating lease Total 408,003 706 111,397 105,640 478 - 304,922 933 66,034 16,350 (65,036) 471,420 3,067 109,185 15,936 (12,060) 375,765 243,731 522 29,709 10,951 (13,034) 271,879 41,252 - 2,728 408 (1,100) 43,288 67,657 - 79,638 316 (94,067) 53,544 30,833 - 12,892 1,202,038 2,639 302,398 1,952 (14,471) 31,206 48,980 (199,768) 1,356,287 Depreciation and amortization Intangible assets Property Machinery and office equipment Vehicle Tangible assets subject to operating lease Total Balance as at 1 January Charge for the period Foreign currency translation differences Disposals Closing balance 262,307 49,750 9,482 (21,627) 299,912 83,707 10,627 4,145 (5,191) 93,288 173,138 26,770 8,081 (12,375) 195,614 7,188 2,433 257 (738) 9,140 9,493 4,249 718 (5,605) 8,855 535,833 93,829 22,683 (45,536) 606,809 INTEGRATED ANNUAL REPORT 2022 400 OTP BANK IFRS REPORT (CONSOLIDATED) NOTE 13: PROPERTY, EQUIPMENT AND INTANGIBLE ASSETS (in HUF mn) [continued] For the year ended 31 December 2022 [continued] Impairment Intangible assets Goodwill Property Machinery and office equipment Tangible assets subject to operating lease Total Balance as at 1 January Impairment for the period Release of impairment for the period Foreign currency translation differences Use of impairment Closing balance 2,705 37 - 54 - - 67,715 - (26,849) 2,796 40,866 3,553 590 - 258 (150) 4,251 43 - 3 - 46 137 - (122) 7 (3) 19 6,438 68,342 (122) (26,527) (153) 47,978 Intangible assets Goodwill Property Machinery and office equipment Vehicle Construction in progress Tangible assets subject to operating lease Total Carrying value Balance as at 1 January Closing balance 142,991 168,712 105,640 68,319 217,662 278,226 70,550 76,219 34,064 34,148 67,657 53,544 Fair values - - 308,375 76,230 34,122 Gross amount of the fully depreciated assets that are still in use 152,718 - 26,007 144,310 1,504 - - 21,203 22,332 659,767 701,500 22,351 441,078 - 324,539 An analysis of the intangible assets for the year ended 31 December 2022 is as follows: Intangible assets Self-developed Purchased Total Gross values Accumulated amortization Impairment Carrying value 14,704 (5,508) - 9,196 456,716 (294,404) (2,796) 159,516 471,420 (299,912) (2,796) 168,712 INTEGRATED ANNUAL REPORT 2022 401 OTP BANK IFRS REPORT (CONSOLIDATED) NOTE 13: PROPERTY, EQUIPMENT AND INTANGIBLE ASSETS (in HUF mn) [continued] For the year ended 31 December 2022 [continued] Carrying value of the investment and goodwill allocated to the appropriate cash generating units Subsidiaries DSK Bank EAD (Bulgaria) OTP banka d.d. (Croatia) POK-DSK Rodina a.d. (Bulgaria) George Consult (Croatia) OTP Home Solutions Llc. (Hungary) Carrying amounts of the subsidiary in HUF million Goodwill values in HUF million Goodwill values in million functional currency Type of functional currency Consolidated ownership interest With ownership adjusted company value in HUF million Applied long term grow rate Applied long term discount rate 280,722 44,375 205,349 23,235 1,680 225 2,570 490,546 11 220 478 68,319 28,541 77 58 11 4 HUF BGN EUR HUF 99.92% 840,031 3.00% 12.54% 100.00% 99.85% 410,711 2.69% 10.69% 16,564 3.00% 12.54% HRK 76.00% 478 HUF 100.00% 171 2,570 2.69% 10.69% 3.00% 16.26% INTEGRATED ANNUAL REPORT 2022 402 OTP BANK IFRS REPORT (CONSOLIDATED) NOTE 13: PROPERTY, EQUIPMENT AND INTANGIBLE ASSETS (in HUF mn) [continued] For the year ended 31 December 2021 Cost Balance as at 1 January Increase due to acquisition Additions Foreign currency translation differences Disposals Closing balance Intangible assets Goodwill Property Machinery and office equipment Vehicle Construction in progress Tangible assets subject to operating lease Total 364,495 101,393 285,506 212,105 23,893 23,403 90,887 - 28,684 37,266 19,135 111,316 4,656 (52,035) 408,003 4,247 - 105,640 3,609 (12,877) 304,922 3,237 (8,877) 243,731 163 (1,939) 41,252 136 (67,198) 67,657 28,926 13,427 422 (11,942) 30,833 1,039,721 - 300,715 16,470 (154,868) 1,202,038 Depreciation and amortization Intangible assets Property Machinery and office equipment Vehicle Tangible assets subject to operating lease Total Balance as at 1 January Charge for the period Foreign currency translation differences Disposals Closing balance 224,180 44,973 3,263 (10,109) 262,307 77,753 9,219 1,266 (4,531) 83,707 155,292 22,753 2,394 (7,301) 173,138 6,241 1,986 102 (1,141) 7,188 10,279 4,212 262 (5,260) 9,493 473,745 83,143 7,287 (28,342) 535,833 INTEGRATED ANNUAL REPORT 2022 403 OTP BANK IFRS REPORT (CONSOLIDATED) NOTE 13: PROPERTY, EQUIPMENT AND INTANGIBLE ASSETS (in HUF mn) [continued] For the year ended 31 December 2021 [continued] Impairment Intangible assets Property Machinery and office equipment Tangible assets subject to operating lease Total Balance as at 1 January Impairment for the period Release of impairment for the period Foreign currency translation differences Use of impairment Closing balance 2,704 - - 5 (4) 2,705 1,122 2,967 - 55 (591) 3,553 42 - - 6 (5) 43 338 9 (204) (1) (5) 137 4,206 2,976 (204) 65 (605) 6,438 Intangible assets Goodwill Property Machinery and office equipment Vehicle Construction in progress Tangible assets subject to operating lease Total Carrying value Balance as at 1 January Closing balance 137,611 142,991 101,393 105,640 206,631 217,662 56,771 70,550 17,652 34,064 23,403 67,657 Fair values - - 247,754 70,258 34,063 Gross amount of the fully depreciated assets that are still in use 129,805 - 25,396 132,611 924 - - 18,309 21,203 561,770 659,767 21,339 373,414 - 288,736 An analysis of the intangible assets for the year ended 31 December 2021 is as follows: Intangible assets Self-developed Purchased Total Gross values Accumulated amortization Impairment Carrying value 12,700 (5,017) - 7,683 395,303 (257,290) (2,705) 135,308 408,003 (262,307) (2,705) 142,991 INTEGRATED ANNUAL REPORT 2022 404 OTP BANK IFRS REPORT (CONSOLIDATED) NOTE 13: PROPERTY, EQUIPMENT AND INTANGIBLE ASSETS (in HUF mn) [continued] For the year ended 31 December 2021 [continued] Carrying value of the investment and goodwill allocated to the appropriate cash generating units Subsidiaries DSK Bank EAD (Bulgaria) OTP banka d.d. (Croatia) JSC “OTP Bank” (Russia) POK-DSK Rodina a.d. (Bulgaria) George Consult (Croatia) Carrying amounts of the subsidiary in HUF million Goodwill values in HUF million Goodwill values in million functional currency Type of functional currency Consolidated ownership interest With ownership adjusted company value in HUF million Applied long term grow rate Applied long term discount rate 280,692 43,138 28,541 77 HUF BGN 99.91% 832,445 3.00% 7.90% 205,349 21,421 58 EUR 100.00% 361,995 2.69% 8.83% 124,411 40,866 9,395 1,680 225 612,357 11 204 105,640 11 4 RUB HUF HRK 97.92% 99.85% 76.00% 187,552 1.89% 15.44% 15,299 3.00% 7.90% 171 2.69% 8.83% INTEGRATED ANNUAL REPORT 2022 405 OTP BANK IFRS REPORT (CONSOLIDATED) NOTE 14: INVESTMENT PROPERTIES (in HUF mn) An analysis of the change in gross values of investment properties is as follows: Gross values Balance as at 1 January Increase due to transfer from inventories or owner-occupied properties Increase from purchase Transfer to held-for-sale properties Transfer to inventories or owner-occupied properties Disposal due to sale Foreign currency translation difference Closing balance The applied depreciation and amortization rates were as follows: 2022 40,241 1,830 20,935 (321) (1,442) (1,798) 1,901 61,346 2021 54,154 3,425 134 (66) (2,858) (14,993) 445 40,241 2022 2021 Depreciation and amortization rates 2.00% - 20.00% 1.00% - 20.00% An analysis of the movement in the depreciation and amortization on investment properties is as follows: Depreciation and amortization Balance as at 1 January Additions due to transfer from inventories or owner-occupied properties Charge for the period Transfer to inventories or owner-occupied properties Disposal due to sale Transfer to held-for-sale properties Foreign currency translation difference Closing balance 2022 9,111 1,513 912 (126) (780) (17) 660 11,273 An analysis of the movement in the impairment on investment properties is as follows: Impairment Balance as at 1 January Impairment for the period Release of impairment for the period Use of impairment Decrease due to transfer to inventories or owner-occupied properties Foreign currency translation difference Closing balance 2022 1,248 1,389 (63) (40) (8) 95 2,621 2021 11,383 1,296 1,113 (236) (4,577) - 132 9,111 2021 4,170 54 (297) (2,726) - 47 1,248 INTEGRATED ANNUAL REPORT 2022 406 OTP BANK IFRS REPORT (CONSOLIDATED) NOTE 14: INVESTMENT PROPERTIES (in HUF mn) [continued] Carrying values Balance as at 1 January Closing balance Fair values 2022 29,882 47,452 61,198 2021 38,601 29,882 34,257 The Group chose the cost model for measuring investment properties but estimates and reviews the fair value of the investment properties by external experts, these investment properties would have been presented on level 3 in the fair value hierarchy if the Group didn’t apply cost method for this recognition. Income and expenses Rental income Direct operating expenses of investment properties – income generating Direct operating expenses of investment properties – non income generating 2022 2,511 426 82 2021 2,621 318 14 INTEGRATED ANNUAL REPORT 2022 407 OTP BANK IFRS REPORT (CONSOLIDATED) NOTE 15: DERIVATIVE FINANCIAL ASSETS DESIGNATED AS HEDGE ACCOUNTING (in HUF mn) Positive fair value of derivative financial assets designated as fair value hedge CCIRS and mark-to-market CCIRS designated as fair value hedge Foreign exchange swap designated as fair value hedge Interest rate swaps designated as fair value hedge Total 2022 2021 20,732 1,696 25,819 48,247 5,471 - 13,286 18,757 INTEGRATED ANNUAL REPORT 2022 408 OTP BANK IFRS REPORT (CONSOLIDATED) NOTE 16: OTHER ASSETS (in HUF mn) Other assets are expected to be recovered or settled no more than twelve months after the reporting period. 2022 2021 Other financial assets Receivables from card operations Prepayments and accrued income on other financial assets Trade receivables Receivables from investment services Other advances Stock exchange deals Giro clearing accounts Receivables due from pension funds and investment funds Receivables from leasing activities Advances for securities and investments Other financial assets Loss allowance on other financial assets Total Other non-financial assets Prepayments and accrued income on other non-financial assets Receivables, subsidies from the State, Government Settlement and suspense accounts Biological assets and agricultural produce Other non-financial assets Impairment on other non-financial assets Total Other assets (under IAS 2) Inventories Repossessed real estate Repossessed other non-financial assets Write-down of the assets measured under IAS 2 Total Total other assets 67,981 29,284 37,777 57,189 19,652 31,234 12,593 6,478 1,778 358 30,490 (31,833) 262,981 2022 62,878 23,383 40,066 8,366 27,963 (7,041) 155,615 2022 48,210 6,985 1,192 (3,864) 52,523 27,820 27,778 24,951 15,077 21,043 12,255 2,635 3,250 363 525 17,019 (16,800) 135,916 2021 46,418 15,800 14,974 5,193 15,495 (4,413) 93,467 2021 43,843 6,354 1,069 (3,864) 47,402 471,119 276,785 INTEGRATED ANNUAL REPORT 2022 409 OTP BANK IFRS REPORT (CONSOLIDATED) NOTE 16: OTHER ASSETS (in HUF mn) [continued] An analysis of the movement in the loss allowance on other financial assets is as follows: Balance as at 1 January Loss allowance for the period Release of allowance for the period Use of loss allowance Reclassification Foreign currency translation difference Closing balance 2022 16,800 22,472 (8,917) (2,083) 253 3,308 31,833 An analysis of the movement in the impairment on other non-financial assets is as follows: Balance as at 1 January Impairment for the period Release of impairment for the period Use of impairment Reclassification Foreign currency translation difference Closing balance 2022 4,413 3,304 (647) (324) (253) 548 7,041 2021 18,459 8,569 (6,903) (3,767) - 442 16,800 2021 4,699 949 (653) (751) - 169 4,413 INTEGRATED ANNUAL REPORT 2022 410 OTP BANK IFRS REPORT (CONSOLIDATED) NOTE 17: AMOUNTS DUE TO BANKS, THE NATIONAL GOVERNMENTS, DEPOSITS FROM THE NATIONAL BANKS AND OTHER BANKS (in HUF mn) Within one year In HUF In foreign currency Over one year In HUF In foreign currency Total 2022 369,015 218,611 587,626 689,579 185,953 875,532 2021 277,397 225,398 502,795 900,948 163,605 1,064,553 1,463,158 1,567,348 Interest rates on amounts due to banks, the National Governments, deposits from the National Banks and other banks are as follows: Within one year In HUF In foreign currency 1 Over one year In HUF In foreign currency 1 2022 2021 (2.40)% - 18.00% (2.32)% - 12.00% (2.04)% - 4.66% (2.40)% - 17.60% (2.40)% - 9.23% (2.40)% - 13.76% (2.40)% - 4.66% (2.40)% - 12.00% 1 The highest interest rates for due to banks denominated in foreign exchange relate to loans taken from EBRD and Green for Growth Fund in Ukraine. Average interest rates on amounts due to banks, the National Governments, deposits from the National Banks and other banks denominated in HUF Average interest rates on amounts due to banks, the National Governments, deposits from the National Banks and other banks denominated in in foreign currency 2022 2021 2.28% 1.20% 2.40% 1.49% INTEGRATED ANNUAL REPORT 2022 411 OTP BANK IFRS REPORT (CONSOLIDATED) NOTE 18: REPO LIABILITIES (in HUF mn) Within one year In HUF In foreign currency Over one year In HUF In foreign currency Total 2022 29,147 197 29,344 96 187,929 188,025 217,369 2021 49,726 29,321 79,047 - - - 79,047 Interest rates on repo liabilities are as follows: Interest rates on repo liabilities denominated in HUF Interest rates on repo liabilities denominated in foreign currency 2022 2021 4.75% - 15.47% 0.00% - 2.80% 2.47% - 5.20% (0.95)% - 0.00% INTEGRATED ANNUAL REPORT 2022 412 OTP BANK IFRS REPORT (CONSOLIDATED) NOTE 19: FINANCIAL LIABILITIES DESIGNATED AT FAIR VALUE THROUGH PROFIT OR LOSS (in HUF mn) 2022 2021 Within one year In HUF In foreign currency Over one year In HUF In foreign currency Total Contractual amount outstanding Result from associated entity's measured at fair value attributable to the Group 1,716 - 1,716 52,475 - 52,475 54,191 19,853 37,616 1,784 - 1,784 39,400 - 39,400 41,184 21,479 21,051 Interest conditions of financial liabilities designated at fair value through profit or loss can be analysed as follows: Interest rates on financial liabilities designated at fair value denominated in HUF within one year Interest rates on financial liabilities designated at fair value denominated in HUF over one year 2022 2021 2.19% - 3.96% 0.46% - 2.46% 0.01% - 4.63% 0.01% - 2.90% Certain MFB (“Hungarian Development Bank”) refinanced loan receivables are categorised as fair value through profit or loss based on SPPI test. Related refinancing loans at the liability side are categorised as fair value through profit or loss based on fair value option due to accounting mismatch as provided by the IFRS 9 standard. The Group controls capital funds where it does not hold the 100% of the owner rights. The related non-controlling interest is treated as financial liability designated at fair value through profit or loss as it is not considered equity under IAS 32. INTEGRATED ANNUAL REPORT 2022 413 OTP BANK IFRS REPORT (CONSOLIDATED) NOTE 20: DEPOSITS FROM CUSTOMERS (in HUF mn) Within one year In HUF In foreign currency Over one year In HUF In foreign currency Total Interest rates on deposits from customers are as follows: Within one year In HUF In foreign currency1 Over one year In HUF In foreign currency 2022 2021 7,910,448 16,757,984 24,668,432 274,217 246,156 520,373 7,829,595 12,758,360 20,587,955 293,606 187,083 480,689 25,188,805 21,068,644 2022 2021 0.00% - 17.95% (0.40)% - 45.10% (2.48)% - 7.96% (1.01)% - 17.20% 0.00%- 13.00% 0.00% - 18.00% 0.01% - 3.00% 0.00% - 8.90% 1 The highest interest rate regarding within-one-year deposits in foreign currency for the current and previous year relate to treasury deposit in Turkish lira in Hungary. Average interest rates on deposits from customers denominated in HUF Average interest rates on deposits from customers denominated in foreign currency 2022 2.21% 0.68% 2021 0.18% 0.34% An analysis of deposits from customers by type is as follows: 2022 2021 Retail deposits Corporate deposits Municipality deposits Total 13,739,669 10,408,982 1,040,154 25,188,805 54.55% 41.32% 4.13% 100.00% 11,982,784 8,093,206 992,654 21,068,644 56.88% 38.41% 4.71% 100.00% INTEGRATED ANNUAL REPORT 2022 414 OTP BANK IFRS REPORT (CONSOLIDATED) NOTE 21: LIABILITIES FROM ISSUED SECURITIES (in HUF mn) With original maturity Within one year In HUF In foreign currency Over one year In HUF In foreign currency Total Interest rates on liabilities from issued securities are as follows: 2022 48,755 6,427 55,182 373,645 441,855 815,500 870,682 2021 9,332 13 9,345 426,929 51 426,980 436,325 2022 2021 Issued securities denominated in HUF Issued securities denominated in foreign currency 0.60% - 15.00% 0.74% - 7.35% 0.60% - 4.26% 0.74% - 5.00% Average interest rates on issued securities denominated in HUF Average interest rates on issued securities denominated in foreign currency 2022 5.00% 2.95% 2021 2.20% 0.25% Issued securities denominated in HUF as at 31 December 2022 (in HUF mn) Name Date of issue Maturity Nominal value (in HUF mn) Amortized cost (in HUF mn) Interest conditions Hedged (actual interest rate in % p.a.) 1 2 3 4 5 6 7 8 OTPX2023A OTPX2023B OTPX2024A OTPX2024B OTPX2024C OTP_HUF_25/1 OTP_HUF_26/1 OTPRF2023A Subtotal 22/03/2013 28/06/2013 18/06/2014 10/10/2014 15/12/2014 18/11/2022 22/12/2022 22/03/2013 24/03/2023 26/06/2023 21/06/2024 16/10/2024 20/12/2024 18/11/2025 05/01/2026 24/03/2023 312 198 241 295 242 25,562 10,229 1,010 38,089 indexed indexed indexed indexed indexed fix fix indexed 410 260 310 378 309 26,046 10,270 1,215 39,198 1.70 0.60 1.30 0.70 0.60 15.00 12.00 1.70 hedged hedged hedged hedged hedged hedged INTEGRATED ANNUAL REPORT 2022 415 OTP BANK IFRS REPORT (CONSOLIDATED) NOTE 21: LIABILITIES FROM ISSUED SECURITIES (in HUF mn) [continued] Issued securities denominated in HUF as at 31 December 2022 (in HUF mn) [continued] Name Date of issue Maturity Nominal value (in HUF mn) Amortized cost (in HUF mn) Interest conditions Hedged (actual interest rate in % p.a.) 9 10 11 12 13 14 15 16 OJB2023_I OJB2024_A OJB2024_II OJB2025_II OJB2027_I OJB2029_A OJB2031_I Other 05/04/2018 17/09/2018 10/10/2018 03/02/2020 23/07/2020 25/07/2022 18/08/2021 24/11/2023 20/05/2024 24/10/2024 26/11/2025 27/10/2027 24/05/2029 22/10/2031 Total issued securities in HUF 44,120 53,732 96,800 22,550 76,850 91,510 82,000 269 505,920 39,968 fix 1.75 hedged 53,933 floating 17.36 79,228 16,193 52,608 fix fix fix 2.50 1.50 1.25 hedged hedged hedged 91,488 floating 17.13 49,515 fix 2.50 hedged 269 422,400 Issued securities denominated in foreign currency as at 31 December 2022 Name Date of issue Maturity Type of FX Nominal value Amortized cost Interest conditions 1 2 3 4 XS2560693181 01/12/2022 04/03/2026 XS2499691330 13/07/2022 13/07/2025 XS2536446649 29/09/2022 29/09/2026 EUR EUR USD Other 1 Total issued securities in FX Total issued securities (FX mn) (FX mn) (actual interest rate in % p.a.) 650 399 60 12 260,136 159,859 22,541 60 442,596 653 409 61 15 261,341 163,893 22,972 76 448,282 870,682 fix fix fix 7.35 5.50 7.25 1Issued other securities denominated in foreign currency are promissory notes issued by JSC “OTP Bank” (Russia) in the amount of HUF 60 million as at 31 December 2022. Issued securities denominated in HUF as at 31 December 2021 (in HUF mn) Name Date of issue Maturity Nominal value (in HUF mn) Amortized cost (in HUF mn) Interest conditions Hedged (actual interest rate in % p.a.) 1 2 3 4 5 6 7 8 9 10 11 12 OTPX2022A OTPX2022B OTPX2022C OTPX2022D OTPX2023A OTPX2023B OTPX2024A OTPX2024B OTPX2024C OTPRF2022A OTPRF2022B OTPRF2022C Subtotal 22/03/2012 18/07/2012 29/10/2012 28/12/2012 22/03/2013 28/06/2013 18/06/2014 10/10/2014 15/12/2014 22/03/2012 22/03/2012 28/06/2012 23/03/2022 18/07/2022 28/10/2022 27/12/2022 24/03/2023 26/06/2023 21/06/2024 16/10/2024 20/12/2024 23/03/2022 23/03/2022 28/06/2022 175 164 177 238 312 198 241 295 242 2,321 934 209 5,506 236 549 317 290 366 272 277 336 275 indexed indexed indexed indexed indexed indexed indexed indexed indexed 2,513 indexed 1,011 indexed indexed 266 6,708 NaN 1.70 1.70 1.70 1.70 0.60 1.30 0.70 0.60 1.70 1.70 1.70 hedged hedged hedged hedged hedged hedged hedged hedged hedged hedged hedged hedged INTEGRATED ANNUAL REPORT 2022 416 OTP BANK IFRS REPORT (CONSOLIDATED) NOTE 21: LIABILITIES FROM ISSUED SECURITIES (in HUF mn) [continued] Issued securities denominated in HUF as at 31 December 2021 (in HUF mn) [continued] Name Date of issue Maturity Nominal value (in HUF mn) Amortized cost (in HUF mn) Interest conditions Hedged (actual interest rate in % p.a.) 13 14 15 16 17 18 19 20 21 22 23 33 OTPRF2022D OTPRF2022E OTPRF2022F OTPRF2023A OJB2023_I OJB2024_A OJB2024_C OJB2024_II OJB2025_II OJB2027_I OJB2031_I Other 28/06/2012 29/10/2012 28/12/2012 22/03/2013 05/04/2018 17/09/2018 24/02/2020 10/10/2018 03/02/2020 23/07/2020 18/08/2021 28/06/2022 31/10/2022 28/12/2022 24/03/2023 24/11/2023 20/05/2024 24/10/2024 24/10/2024 26/11/2025 27/10/2027 22/10/2031 Total issued securities in HUF 286 862 708 899 44,120 57,067 80,125 96,800 22,550 76,850 82,000 211 467,984 hedged hedged hedged hedged hedged 324 933 773 977 indexed indexed indexed indexed 1.75 4.26 3.95 2.5 1.5 1.25 2.5 42,300 57,010 79,972 89,138 20,003 67,257 70,655 211 436,261 1.70 1.70 1.70 1.70 fix floating floating fix fix fix fix Issued securities denominated in foreign currency are promissory notes issued by JSC “OTP Bank” (Russia) in the amount of HUF 64 million as at 31 December 2021. Hedge accounting Certain issued structured securities are hedged by the Bank with interest rate swaps (“IRS”) which exchange the fixed and floating interest rate with the interest rate of the securities between the parties at a notional amount that equals the nominal amount of the hedged securities. These are considered as fair value hedge relationships as they cover the interest rate risk arising from the coupons of the hedged securities. OTP Bank does not intend to be exposed to the risk embedded in the structured bonds, consequently as part of interest rate swap transaction the structured interest payments are swapped to floating interest rate. This hedging relationship meets all of the following hedge effectiveness requirements: • • • there is an economic relationship between the hedged item and the hedging instrument the effect of credit risk does not dominate the value changes that result from that economic relationship the hedge ratio of the hedging relationship is the same as that resulting from the quantity of the hedged item that the Bank actually hedges and the quantity of the hedging instrument that the Bank actually uses to hedge that quantity of hedged item The cash-flows of the fixed rate securities issued by the Bank are exposed to the changes in the HUF/EUR foreign exchange rate and the volatility of the quoted interest rates of EUR and HUF. The interest rate risk and foreign exchange risk related to these securities are hedged with EUR and HUF IRS transactions, where the fixed interests were swapped to payments linked to 3-month HUF BUBOR and EURIBOR, resulting in a decrease in the interest rate and foreign exchange exposure of issued securities. INTEGRATED ANNUAL REPORT 2022 417 OTP BANK IFRS REPORT (CONSOLIDATED) NOTE 21: LIABILITIES FROM ISSUED SECURITIES (in HUF mn) [continued] Term Note Program in the value of HUF 200 billion for the year of 2022/2023 On 10 May 2022 the Bank initiated term note program in the value of HUF 200 billion with the intention of issuing registered dematerialized bonds in public. On 10 August the National Bank of Hungary approved the prospectus of Term Note Program. The prospectus is valid for 12 months following the disclosure. The Issuer can initiate to introduce the bonds issued under the program to the Hungarian and to other stock exchanges without any obligations. Term Note Program in the value of HUF 200 billion for the year of 2021/2022 On 28 May 2021 the Bank initiated term note program in the value of HUF 200 billion with the intention of issuing registered dematerialized bonds in public. On 8 July 2021, the National Bank of Hungary approved the prospectus of Term Note Program. The prospectus is valid for 12 months following the disclosure. The Issuer can initiate to introduce the bonds issued under the program to the Hungarian and to other stock exchanges without any obligations. Issuance of Green Senior Preferred Notes in the aggregate nominal amount of EUR 400 million OTP Bank Plc have been issued “green” notes (ISIN: XS2499691330) on 13 July 2022 as value date in the aggregate nominal amount of EUR 400 million. The non-call 2 years senior preferred notes have a three-year term and carry an annually paid fixed coupon of 5.500% in the first two years. With respect to the third year, the quarterly coupon is calculated as the sum of the initial margin (of 426.5 basis points) and the 3-month EURIBOR rate. The notes are rated ’BBB’ by S&P Ratings Europe Limited and ’BBB+’ by Scope Ratings GmbH. The notes are listed on the Luxembourg Stock Exchange. Issuance of Green Senior Preferred Notes in the aggregate nominal amount of USD 60 million OTP Bank Plc issued “green” notes (ISIN: XS2536446649) on 29 September 2022 as value date in the aggregate nominal amount of USD 60 million. The notes are rated ’BBB’ by S&P Ratings Europe Limited and ’BBB+’ by Scope Ratings GmbH. The notes are listed on the Luxembourg Stock Exchange. Issuance of Senior Preferred Notes in the aggregate nominal amount of EUR 650 million OTP Bank Plc have been issued the notes (ISIN: XS2560693181) on 1 December 2022 as value date in the aggregate nominal amount of EUR 650 million. The 3.25 Non-Call 2.25 years Senior Preferred Notes were priced on 23 November 2022. The notes are rated ’BBB’ by S&P Ratings Europe Limited and ’BBB+’ by Scope Ratings GmbH. The notes are listed on the Luxembourg Stock Exchange. There was other issuance of notes denominated in USD after the balance sheet date. See details in Note 52. INTEGRATED ANNUAL REPORT 2022 418 OTP BANK IFRS REPORT (CONSOLIDATED) NOTE 22: DERIVATIVE FINANCIAL LIABILITIES HELD FOR TRADING (in HUF mn) Negative fair value of derivative financial liabilities held for trading by type of contracts Foreign exchange swaps held for trading Commodity swaps Interest rate swaps held for trading Foreign exchange forward contracts held-for-trading CCIRS and mark-to-market CCIRS held for trading Held for trading option contracts Held-for-trading forward security agreement Other derivative transactions held for trading1 Total 1 Other category includes: fx spot, equity swaps, forward rate agreement, options and index futures. 2022 83,149 31,632 237,269 13,740 15,759 1,891 - 2,307 385,747 2021 46,380 51,508 87,945 7,738 7,789 479 13 864 202,716 INTEGRATED ANNUAL REPORT 2022 419 OTP BANK IFRS REPORT (CONSOLIDATED) NOTE 23: DERIVATIVE FINANCIAL LIABILITIES DESIGNATED AS HEDGE ACCOUNTING (in HUF mn) Negative fair value of derivative financial liabilities designated as hedge accounting by type of contracts CCIRS and mark-to-market CCIRS designated as fair value hedge Foreign exchange swap designated as fair value hedge Interest rate swaps designated as fair value hedge Total 2022 5,398 16,199 6,352 27,949 2021 5,451 - 5,777 11,228 INTEGRATED ANNUAL REPORT 2022 420 OTP BANK IFRS REPORT (CONSOLIDATED) NOTE 24: PROVISIONS AND OTHER LIABILITIES (in HUF mn) Other liabilities are expected to be recovered or settled no more than twelve months after the reporting period. Besides the total other liabilities mentioned above, which are expected to be recovered or settled more than twelve months after the reporting period are the following: accrued contractual liabilities, compulsory pension reserve, loans from government and liabilities from preferential dividend shares. 2022 2021 Other financial liabilities Liabilities connected to Cafeteria benefits Liabilities from investment services Accrued expenses on other financial liabilities Liabilities from card transactions Accounts payable Liabilities due to short positions Giro clearing accounts Advances received from customers Liabilities from wages and other salary related payments Loans from government Dividend payable Other financial liabilities Subtotal Other non-financial liabilities Clearing and giro settlement accounts Liabilities from social security contributions Accrued expenses on other non-financial liabilities Liabilities related to housing loans Insurance technical reserve Other non-financial liabilities Subtotal Total 91,001 108,513 55,898 75,544 56,828 24,596 32,133 12,540 34,672 7,961 207 82,387 582,280 2022 46,800 11,749 13,647 12,868 2,354 37,956 125,374 707,654 114,867 92,612 58,247 31,484 46,243 16,904 14,830 11,903 13,092 5,851 135 79,603 485,771 2021 48,715 11,853 13,029 11,428 3,416 23,869 112,310 598,081 INTEGRATED ANNUAL REPORT 2022 421 OTP BANK IFRS REPORT (CONSOLIDATED) NOTE 24: PROVISIONS AND OTHER LIABILITIES (in HUF mn) [continued] The provisions are detailed as follows: Commitments and guarantees given Total provision according to IFRS 9 Pending legal issues and tax litigation Pensions and other retirement benefit obligations Other long-term employee benefits Restructuring Provision due to CHF loans conversion at foreign subsidiaries Other provision Total provision according to IAS 37 2022 63,372 63,372 37,043 8,225 1,331 1,256 900 19,494 68,249 2021 51,990 51,990 35,354 9,308 910 1,801 1,285 19,151 67,809 Total 131,621 119,799 The movements of provisions according to IFRS 9 can be summarized as follows: Balance as at 1 January Provision for the period Release of provision for the period Use of provision Change due to acquisition Transfer Foreign currency translation differences Closing balance 2022 51,990 102,928 (96,783) (293) 21 - 5,509 63,372 The movements of provisions according to IAS 37 can be summarized as follows: Balance as at 1 January Provision for the period Release of provision for the period Use of provision Change due to actuarial gains or losses related to employee benefits Change due to acquisition Unwinding of the discounted amount Transfer Foreign currency translation differences Closing balance 2022 67,809 27,290 (24,846) (6,878) (1,098) 57 16 - 5,899 68,249 2021 54,810 28,869 (28,770) (7) - (4,426) 1,514 51,990 2021 61,657 37,924 (27,167) (10,953) (42) - 7 4,426 1,957 67,809 INTEGRATED ANNUAL REPORT 2022 422 OTP BANK IFRS REPORT (CONSOLIDATED) NOTE 25: SUBORDINATED BONDS AND LOANS (in HUF mn) Within one year In HUF In foreign currency Over one year In HUF In foreign currency Total Types of subordinated bonds and loans are as follows: Debt securities issued Loan received Total Interest rates on subordinated bonds and loans are as follows: Denominated in HUF Denominated in foreign currency Average interest rates on subordinated bonds and loans denominated in foreign currency 2022 - 3,395 3,395 - 298,589 298,589 301,984 2022 7,798 294,186 301,984 2021 - 2,841 2,841 - 275,493 275,493 278,334 2021 6,558 271,776 278,334 2022 2021 - 2.90% - 5.00% - 2.50% - 5.00% 2022 3.10% 2021 2.75% Subordinated bonds and loans can be detailed as follows: Type Nominal value Date of issuance Date of maturity Issue price Interest conditions Subordinated bond EUR 231 million 07/11/2006 Perpetual 99.375% Subordinated bond Subordinated loan EUR 499 million USD 17.0 million 15/07/2019 15/07/2029 99.738% 05/06/2018 30/06/2025 100.00% Three-month EURIBOR + 3%, variable after year 10 (payable quarterly) Fixed 2.875% annual in the first 5 years and callable after 5 years, starting from year 6 fix coupon (payable annually) is calculated as a sum of the initial margin (320 basis point) and the 5 year mid- swap rate prevailing at the end of the 5 year. Bullet repayment, once at the end of the loan agreement Interest rate as at 31 December 2022 4.742% 2.875% 5.00% INTEGRATED ANNUAL REPORT 2022 423 OTP BANK IFRS REPORT (CONSOLIDATED) NOTE 26: SHARE CAPITAL (in HUF mn) Authorized, issued and fully paid: Ordinary shares 2022 28,000 2021 28,000 Share capital is the portion of the Bank’s equity that has been obtained by the issue of shares in the corporation to a shareholder, usually for cash. The nominal value of the shares is HUF 100 per shares. All of the shares are ordinary shares representing the same rights to the shareholders. Furthermore, there are no restrictions on the distribution of dividends and the repayment of capital. INTEGRATED ANNUAL REPORT 2022 424 OTP BANK IFRS REPORT (CONSOLIDATED) NOTE 27: RETAINED EARNINGS AND RESERVES (in HUF mn) In 2021, the Bank did not pay dividend based on the earlier NBH warnings issued due to covid moratoria. In 2022 dividend of HUF 119 billion from the profit of years 2019 and 2020 and HUF 1 billion from the profit of year 2021 (totally HUF 120 billion) was paid out, which meant HUF 425.89 (for the year 2019 and 2020) and HUF 3.57 (for the year 2021) dividend per share payable to shareholders. In 2023 dividend of HUF 84,000 million are expected to be proposed by the Management from the profit of the year 2022, which means HUF 300 dividend per share payable to the shareholders. The retained earnings and reserves according to IFRS contains the retained earnings (HUF 774,151 million and HUF 844,343 million) and reserves (HUF 2,621,064 million and HUF 2,265,166 million) as at 31 December 2022 and 2021, respectively. The reserves include mainly the option reserve, other reserves, the fair value adjustment of financial instruments at fair value through other comprehensive income, share-based payment reserve, fair value of hedge transactions, additional reserves of Income Certificates Exchangeable for Shares (“ICES”), changes in equity accumulated in the previous years at the subsidiaries and due to consolidation as well as translation of foreign exchange differences. In the Consolidated Financial Statements, the Group recognizes the non-monetary items at historical cost. The difference between the historical cost of the non-monetary items in forint amount and the translated foreign currencies into the presentation currency using the exchange rate at the balance sheet date, is presented in the shareholders’ equity as a translation difference. The accumulated amounts of exchange differences were HUF 237,853 million and HUF 58,164 million as at 31 December 2022 and 2021, respectively. On 19 October 2006, the Bank sold 14.5 million Treasury shares owned by the Group through an issue of ICES. Within the transaction 10 million shares owned by OTP Bank, and a further 4.5 million shares owned by the Group were sold during the underwriting period of ICES on the weighted average market price (HUF 7,080) of the Budapest Stock Exchange. The shares have been purchased by Opus Securities S.A. (“OPUS”), which issued an exchangeable bond with a total face value of EUR 514,274,000 backed by those shares. The exchangeable bonds have been sold at a 32% premium over the selling price of the shares. The EUR denominated exchangeable bonds were perpetual and the investors could have exercised the conversion right between years 6 and 10. The bonds carried a fixed coupon of 3.95% during the first 10 years, and thereafter the Issuer had the right to redeem the bonds at face value. Following year 10, the bonds carried a coupon of 3-month EURIBOR +3%. OTP Bank had a discretional right to cancel the interest payments. The interest payable was non-cumulative. Due to the conditions described above, ICES was accounted as an equity instrument and therefore any payment was accounted as equity distribution paid to ICES holders. On 14 September 2021 the Bank decided to terminate the subordinated swap agreement related to ICES transaction as at 29 October 2021, and to exercise its option for repurchasing approximately 14.5 million OTP ordinary shares held by Opus at market price based on the swap agreement. On the same day, the Bank recognised liability due to Opus as a reduction of EUR 514 million in the shareholder’s equity. Treasury shares were repurchased on 29 October 2021 on a price HUF 18,118 and on the same day the swap transaction was financially settled. As a result of the closure of the subordinated swap agreement the Bank’s shareholder’s equity increased by HUF 75,421 million, the Group’s shareholders’ equity increased by HUF 35,063 million. Approximately 12 million pieces of treasury shares were sold to OTP SECOP I. (“OTP Special Employee Stock Ownership Program”) and OTP SECOP II. INTEGRATED ANNUAL REPORT 2022 425 OTP BANK IFRS REPORT (CONSOLIDATED) NOTE 27: RETAINED EARNINGS AND RESERVES (in HUF mn) [continued] Retained earnings Profit of previous years generated by the Group that are not distributed to shareholders as dividends. Other reserves The other reserves contain separated reserves due to statutory provisions. Option reserve OTP Bank Plc and MOL Plc entered into a share swap agreement in 16 April 2009, whereby OTP has changed 24,000,000 OTP ordinary shares for 5,010,501 „A series” MOL shares. The amended final maturity of the share swap agreement is 11 July 2027, until which any party can initiate cash or physical settlement of the transaction. Option reserve represents the written put option over OTP ordinary shares were accounted as a deduction from equity at the date of OTP-MOL share swap transaction. Share-based payment reserve Share-based payment reserve represents the increase in the equity due to the goods or services were received by the Bank in an equity-settled share-based payment transaction, valued at the fair value of the goods or services received (see details in Note 40). Other comprehensive income Other comprehensive income comprises items of income and expense (including reclassification adjustments) that are not recognized in profit or loss as required or permitted by other IFRSs. Net investment hedge in foreign operations Reserve presented as net investment hedge in foreign operations in the sharholders’ equity is related to DSK Bank EAD, OTP banka d.d. and Crnogorska komercijalna banka a.d. INTEGRATED ANNUAL REPORT 2022 426 OTP BANK IFRS REPORT (CONSOLIDATED) NOTE 27: RETAINED EARNINGS AND RESERVES (in HUF mn) [continued] Changes in equity accumulated in the previous year at the subsidiaries and due to consolidation The accumulated changes at the subsidiaries contain the accumulated gains and losses of the subsidiaries from the first day when they were included in the consolidation process. The changes due to consolidation contain the effect on the result of the eliminations in the consolidation process of the previous years. Retained earnings Capital reserve Option reserve Other reserves Actuarial loss related to employee defined benefits Fair value of financial instruments measured at fair value through other comprehensive income Share-based payment reserve Net investment hedge in foreign operations Profit after income tax Changes in equity accumulated in the previous year at the subsidiaries and due to consolidation Foreign currency translation differences Retained earnings and other reserves 1 2022 774,151 52 (55,468) 129,902 544 (107,676) 49,110 (27,405) 346,354 2,047,798 237,853 3,395,215 2021 844,343 52 (55,468) 129,208 (471) 11,690 46,162 (27,405) 455,592 1,647,642 58,164 3,109,509 1See more details in the Consolidated Statement of Comprehensive Income and in the Consolidated statement of Changes in equity on page 6 and 7. Fair value adjustment of securities at fair value through other comprehensive income Balance as at 1 January Change of fair value Deferred tax related to change of fair value Other transfer to retained earnings Deferred tax related to other transfer to retained earnings Transfer to profit or loss due to derecognition Deferred tax related to transfer to proft or loss Foreign currency translation difference Closing balance Expected credit loss on securities at fair value through other comprehensive income Balance as at 1 January Increase of loss allowance Release of loss allowance Decrease due to sale, derecognition Foreign currency translation difference Closing balance 2022 (7,653) (180,981) 22,401 - - 1,040 (194) 955 (164,432) 2022 6,710 40,664 (11,391) (43) 3,685 39,625 2021 43,958 (49,621) 3,035 (5,070) 457 (2,547) 491 1,644 (7,653) 2021 6,984 4,414 (3,453) (1,749) 514 6,710 INTEGRATED ANNUAL REPORT 2022 427 OTP BANK IFRS REPORT (CONSOLIDATED) NOTE 27: RETAINED EARNINGS AND RESERVES (in HUF mn) [continued] Fair value changes of equity instruments as at fair value through other comprehensive income Balance as at 1 January Change of fair value Deferred tax related to change of fair value Transfer to retained earnings due to derecognition Foreign currency translation difference Closing balance Actuarial loss related to defined employee benefits Balance as at 1 January Change of actuarial loss related to employee benefits Deferred tax related to change of actuarial loss related to employee benefits Foreign currency translation difference Closing balance Foreign currency translation difference Balance as at 1 January Change of foreign currency translation Closing balance 2022 12,633 5,394 (1,282) - 386 17,131 2022 (471) 1,097 (43) (39) 544 2022 58,164 179,689 237,853 2021 10,454 2,465 (361) (207) 282 12,633 2021 (513) 98 (11) (45) (471) 2021 (3,369) 61,533 58,164 INTEGRATED ANNUAL REPORT 2022 428 OTP BANK IFRS REPORT (CONSOLIDATED) NOTE 28: TREASURY SHARES (in HUF mn) Nominal value (Ordinary shares) Carrying value at acquisition cost 2022 1,132 106,862 2021 1,091 106,941 The changes in the carrying value of treasury shares are due to repurchase and sale transactions on market authorised by the General Assembly. Change in number of shares: Number of shares as at 1 January Additions Disposals Closing number of shares Change in carrying value: Balance as at 1 January Additions Disposals Closing balance 2022 2021 10,906,881 1,801,256 (1,390,041) 11,318,096 23,924,900 16,251,451 (29,269,470) 10,906,881 2022 106,941 16,268 (16,347) 106,862 2021 124,080 276,433 (293,572) 106,941 INTEGRATED ANNUAL REPORT 2022 429 OTP BANK IFRS REPORT (CONSOLIDATED) NOTE 29: NON-CONTROLLING INTEREST (in HUF mn) Balance as at 1 January Increase due to business combination Non-controlling interest included in net profit for the period Purchase of non-controlling interest Foreign currency translation difference Closing balance 2022 6,198 - 727 (886) (80) 5,959 2021 4,116 1,041 836 - 205 6,198 The non-controlling interest is not significant in respect of the whole OTP Group. INTEGRATED ANNUAL REPORT 2022 430 OTP BANK NOTE 30: INTEREST INCOME, INCOME SIMILAR TO INTEREST INCOME AND EXPENSE (in HUF mn) IFRS REPORT (CONSOLIDATED) 2022 2021 Interest income calculated using the effective interest method from / on loans securities at amortized cost finance lease receivables securities at fair value through other comprehensive income banks and balances with the National Banks placements with other banks liabilities (negative interest expense) repo receivables Subtotal Income similar to interest income from swap deals related to placements with other banks loans mandatorily at fair value through profit or loss swap deals related to credit institutions rental income non-trading securities mandatorily at fair value through profit or loss Subtotal Total interest income and incomes similar to interest income Interest expense due to / from / on swaps related to banks, National Governments and to deposits from the National Banks deposits from customers swaps related to deposits from customers banks, National Governments and on deposits from the National Banks issued securities subordinated and supplementary bonds and loans financial assets (negative interest income) depreciation of assets subject to operating lease and investment properties leases repo liabilities other Total interest expense 981,566 144,757 78,262 54,046 62,121 162,532 20,505 4,261 1,508,050 364,496 54,036 68,123 9,264 54 495,973 692,432 79,602 59,084 49,473 16,527 20,922 3,672 827 922,539 128,519 40,131 15,557 8,964 1,749 194,920 2,004,023 1,117,459 2022 2021 390,375 270,407 128,153 35,134 27,838 8,986 11,830 5,161 2,386 31,006 1,433 912,709 116,895 50,645 23,860 17,467 9,822 7,598 7,275 5,325 1,556 2,299 407 243,149 INTEGRATED ANNUAL REPORT 2022 431 OTP BANK IFRS REPORT (CONSOLIDATED) NOTE 31: LOSS ALLOWANCES / IMPAIRMENT / PROVISIONS (in HUF mn) Loss allowance on loans Loss allowance for the period Release of loss allowance from this: impairment gain Income from loan recoveries Income from recoveries exceeding the gross loans Impairment gain Income from provisions on loans before OTP acquisition Income from recoveries of written-off, but legally existing loans Change in the fair value attributable to changes in the credit risk of loans mandatorily measured at fair value through profit of loss Loss allowance on finance lease Release of loss allowance on finance lease Loss allowance on due from banks, balances with National Banks, on placements and on repo receivables Allowance for the period Release of allowance Loss allowance on securities at fair value through other comprehensive income and on securities at amortized cost Allowance for the period Release of allowance Impairment / (Release of impairment) of intangible, tangible assets subject to operating lease and of investment properties Impairment for the period Release of impairment Provision for commitments and guarantees given Provision for the period Release of provision Loss allowances / Impairment and provisions 2022 2021 676,389 (477,513) 9,517 (67,869) (8,658) (50,715) (1,664) 546,284 (475,067) 10,179 (51,876) (8,752) (35,194) (1,622) (6,832) (6,308) (13,346) 49,433 (25,020) 142,074 51,130 (50,869) 261 77,768 (16,994) 60,774 1,389 (185) 1,204 102,928 (96,783) 6,145 210,458 16,289 20,694 (14,918) 41,406 27,341 (24,737) 2,604 11,048 (7,074) 3,974 63 (501) (438) 28,869 (28,770) 99 47,645 INTEGRATED ANNUAL REPORT 2022 432 OTP BANK IFRS REPORT (CONSOLIDATED) NOTE 32: NET PROFIT FROM FEES AND COMMISSIONS (in HUF mn) Income from fees and commissions Fees and commissions related to lending1 Deposit and account maintenance fees and commissions Fees and commissions related to the issued bank cards Currency exchange gains and losses Fees related to cash withdrawal Fees and commissions related to security trading Fees and commissions related to fund management Insurance fee income Other Fees and commissions from contracts with customers Total 2022 43,179 251,684 136,341 113,494 61,738 32,172 29,906 19,588 51,474 696,397 739,576 2021 36,999 203,553 99,766 47,843 46,143 30,224 23,553 16,974 49,058 517,114 554,113 1 Such kinds of fees and commissions related to lending which aren’t included in the effective interest rate calculation due to their nature. Fee type Deposit and account maintenance fees and commissions and fees related to cash withdrawal Nature and timing of obligation settlement, and the significant payment terms Revenue recognition under IFRS 15 Fees for ongoing account management services are charged on a monthly basis during the period when they are provided. fees Transaction-based are charged when the transaction takes place or charged monthly at the end of the month. The Group provides a number of account management services for both retail and corporate customers in which they charge a fee. Fees related to these services can be typically account transaction fees (money transfer fees, direct debit fees, money standing order fees, etc.), internet banking fees (e.g. OTP Direct fee), account control fees (e.g. sms fee), or other fees for occasional services (account statement fees, other administration fees, etc.). Fees for ongoing account management services are charged to the customer’s account on a monthly basis. The fees are commonly fixed amounts that can be vary per account package and customer category. In the case of the transaction-based fees where the services include money transfer the fee is charged when the transaction takes place. The rate of the fee is typically determined in a certain % of the transaction amount. In the case of other transaction-based fees (e.g. SMS fee), the fee is settled monthly. In the case of occasional services, the Group basically charges the fees when the services are used by the customer. The fees can be fixed fees or they can be set in %. The rates are reviewed by the Group regularly. INTEGRATED ANNUAL REPORT 2022 433 OTP BANK IFRS REPORT (CONSOLIDATED) NOTE 32: NET PROFIT FROM FEES AND COMMISSIONS (in HUF mn) [continued] Fee type Fees and commission related to the issued bank cards Fees and commissions related to security account management services Fees and commissions related to fund management Net insurance fee income Other Nature and timing of obligation settlement, and the significant payment terms Revenue recognition under IFRS 15 The Group provides a variety of bank cards to its customers, for which different fees are charged. The fees are basically charged in connection with the issuance of cards and the related card transactions. The annual fees of the cards are charged in advance in a fixed amount. The amount of the annual card fee depends on the type of card. In case of transaction-based fees (e.g. cash withdrawal/payment fee, merchant fee, interchange fee, etc.), the settlement of the fees will take place immediately after the transaction or on a monthly basis. The fee is typically determined in % of the transaction with a fixed minimum amount. For all other cases where the Group provides a continuous service to the customers (e.g. card closing fee), the fees are charged monthly. The fee is calculated in a fix amount. The rates are reviewed by the Group regularly. The Group provides its clients security account management services. Fees will be charged for account management and transactions on accounts. Account management fees are typically charged quarterly or annually. The amount is determined in %, based on the stocks of securities managed by the clients on the account in a given period. Fees for transactions on the securities account are charged immediately after the transaction. They are determined in %, based on the transaction amount. Fees for complex services provided to clients (e.g. portfolio management or custody) are typically charged monthly or annually. The fees are fixed monthly amounts and in some cases a bonus fee are charged. Fees from fund management services provided to investment funds and from portfolio management provided to insurance companies, funds. The fee income are calculated on the basis of net asset value of the portfolio and by the fee rates determined in the contracts about portfolio management. Due to the fact that the Group rarely provides insurance services to its clients, only acts as an agent, the fee income charged to the customers and fees payable to the insurance company are presented net in the fee income. In addition, agency fee charged for the sale of insurance contracts is also recorded in this line. The fee is charged on a monthly basis and determined in %. Fees for ongoing services are charged on a monthly basis during the period when they are provided. fees Transaction-based are charged when the transaction takes place or charged monthly at the end of the month. Fees for ongoing services are charged quarterly or annually during the period when they are provided. fees are accrued The monthly. Transaction-based are charged when transaction takes place. fees the Fees for ongoing services are charged usually on monthly (mutual funds) or semi-annually (venture capital funds) during the period when they are provided but accrued monthly. Fees for ongoing services are charged on a monthly basis during the period when they are provided. Fees that are not significant in the Group total income are included in Other fees category. Such fees are safe lease, special procedure fee, account rent fee, fee of a copy of document, etc. Other fees may include charges for continuous services or for ad hoc administration services. Continuous fees are charged monthly (e.g., safe lease fees) at the beginning of the period, typically at a fixed rate. Fees for ad hoc services are charged immediately after the service obligation were met, usually in a fixed amount. Fees for ongoing services are charged on a monthly basis during the period when they are provided. Fees for ad hoc services are charged when the transaction takes place. INTEGRATED ANNUAL REPORT 2022 434 OTP BANK IFRS REPORT (CONSOLIDATED) NOTE 32: NET PROFIT FROM FEES AND COMMISSIONS (in HUF mn) [continued] Expense from fees and commissions 2022 2021 Fees and commissions related to issued bank cards Interchange fees Fees and commissions paid on loans Fees and commissions related to deposits Cash withdrawal transaction fees Fees and commissions related to security trading Insurance fees Fees and commissions related to collection of loans Postal fees Money market transaction fees and commissions Other agent fee Other Total Net profit from fees and commissions 56,190 30,470 9,164 9,834 5,292 4,263 1,578 985 576 333 1,912 18,619 139,216 600,360 42,662 22,831 9,502 8,438 4,063 3,730 1,413 830 590 281 1,335 16,264 111,939 442,174 INTEGRATED ANNUAL REPORT 2022 435 OTP BANK IFRS REPORT (CONSOLIDATED) NOTE 33: GAIN AND LOSSES BY TRANSACTIONS (in HUF mn) Gains and losses by transactions Gain by transactions Loss by transactions Gain from sale of loans, placements, finance lease Gain by transactions Loss by transactions (Loss) / Gain from derecognition of securities and other receivables at amortized cost (Loss) / Gain from derecognition of financial assets at amortized cost 2022 7,173 (3,700) 3,473 41 (5,169) (5,128) (1,655) 2021 5,662 (4,808) 854 3,552 (2,521) 1,031 1,885 Foreign exchange result consists of revaluation difference from converting assets and liabilities in foreign currencies into the presentation currency of the consolidation financial statements. Gains and losses by transactions Gain by transactions Loss by transactions Fx (loss) / gain on securities at fair value through profit or loss Gain by transactions Loss by transactions Fx (loss) / gain on derecognition of investment in subsidiaries, associates Gain by transactions Loss by transactions Fx loss on securities at fair value through other comprehensive income Gain by transactions Loss by transactions Fx gain on other securities (Loss) / Gain on securities, net Gains and losses by transactions Gain by transactions Loss by transactions Gain on non-trading securities mandatorily at fair value through profit or loss Gain by transactions Loss by transactions Loss on loans mandatorily at fair value through profit or loss (adjustment resulting from change in market factors) Gain by transactions Loss by transactions Gain on financial assets and liabilities designated at fair value through profit or loss Fair value adjustment on financial instruments measured at fair value through profit or loss 2022 16,494 (19,645) (3,151) - (323) (323) 4,502 (5,516) (1,014) - - - (4,488) 2022 4,247 (4,102) 145 50,693 (60,234) (9,541) 7,809 (2,577) 5,232 (4,164) 2021 9,553 (4,537) 5,016 2,405 (1,889) 516 10,505 (13,092) (2,587) 2,847 (232) 2,615 5,560 2021 5,835 (1,023) 4,812 36,591 (44,346) (7,755) 2,868 (457) 2,411 (532) INTEGRATED ANNUAL REPORT 2022 436 OTP BANK IFRS REPORT (CONSOLIDATED) NOTE 33: GAINS AND LOSSES (in HUF mn) [continued] Gains and losses by transactions Gain by transactions Loss by transactions (Loss) / Gain from fx swap, swap and option deals Gain by transactions Loss by transactions Loss from option deals Gain by transactions Loss by transactions Gain / (Loss) from commodities deals Gain by transactions Loss by transactions Loss from futures deals Net results on derivative instruments and hedge relationships 2022 147,311 (150,804) (3,493) 4,156 (5,082) (926) 148,699 (132,968) 15,731 752 (1,506) (754) 10,558 2021 74,582 (64,034) 10,548 2,684 (3,005) (321) 94,639 (95,794) (1,155) 745 (3,019) (2,274) 6,798 Gains and losses attributable to the hedged risk on the hedged item and on the hedging instruments and ineffectiveness in case of fair value hedge on amortised cost line items are as follows: Fair value hedge Hedged items Hedging instrument Hedge effectiveness 2022 6,750 (9,352) (2,602) 2021 17,406 (15,147) 2,259 INTEGRATED ANNUAL REPORT 2022 437 OTP BANK IFRS REPORT (CONSOLIDATED) NOTE 34: OTHER OPERATING INCOME AND EXPENSES AND OTHER ADMINISTRATIVE EXPENSES (in HUF mn) Other operating income Income from agricultural activity Income from tourism activity Gains on transactions related to property activities Rental income Income from computer programming Fair value adjustment of biological assets and agricultural produce Income from written-of receivable Income from air passenger transport Gains on transactions related to insurance activity Non-repayable assets received Negative goodwill due to acquisition Other income from non-financial activities Total Other operating expenses Expense related to agricultural activity Provision for off-balance sheet commitments and contingent liabilities Financial support for sport association and organization of public utility Expenses related to tourism activity Loss allowance and loan losses on other financial assets Expenses from losses due to foreign currency loan conversion at foreign subsidiaries Impairment on investments 1 Non-repayable assets contributed Impairment on tangible and intangible assets Impairment / (Release of impairment) and loan losses on other non-financial assets and assets measured under IAS 2 Release of provision due to foreign currency loan conversion at foreign subsidiaries Operating expenses of assets subject to operating lease and investment property Other Other expenses from non-financial activities Other costs Total 1 See details in Note 12. 2022 62,809 23,197 5,269 2,175 1,250 (1,939) 3,727 1,863 1,369 447 3,784 21,464 125,415 2022 45,612 2,878 16,370 20,868 13,306 562 901 1,339 627 2,667 (434) 883 23,206 5,927 17,279 128,785 2021 42,526 8,588 6,424 2,132 1,113 (2,551) 3,577 762 657 165 31 17,904 81,328 2021 30,392 11,395 11,111 7,928 2,624 949 6,640 881 2,967 (638) (638) - 12,121 5,613 6,508 85,732 INTEGRATED ANNUAL REPORT 2022 438 OTP BANK IFRS REPORT (CONSOLIDATED) NOTE 34: OTHER OPERATING INCOME AND EXPENSES AND OTHER ADMINISTRATIVE EXPENSES (in HUF mn) [continued] Other administrative expenses Personnel expenses Wages Taxes related to personnel expenses Other personnel expenses Subtotal Depreciation, amortization of tangible, intangible assets, right-of-use assets 2 Other administrative expenses Taxes, other than income tax 3 Services Professional fees Fees payable to authorities and other fees Advertising Administration expenses Rental fees Subtotal Total 2022 2021 311,231 49,015 42,317 402,563 271,497 44,049 25,138 340,684 107,588 94,996 193,587 150,505 22,932 54,751 20,827 17,211 5,184 464,997 975,148 93,678 113,400 21,775 44,113 19,457 14,662 4,847 311,932 747,612 2 See details in Note 13 and Note 36. 3 Special tax of financial institutions was paid by the Group in the amount of HUF 99,974 million for the year ended 31 December 2022 and HUF 19,652 million for the year 2021, recognized as an expense thus decreased the corporate tax base. For the year ended 31 December 2022 financial transaction duty was paid by the Bank in the amount of HUF 88,642 million while for the year ended 31 December 2021 the same duty was HUF 68 billion. The table below contains the detailing of the fees for audit and non-audit services: Ernst & Young Audit Ltd. OTP – annual audit – separate financial statements OTP – annual audit – consolidated financial statements Other audit services based on statutory provisions to OTP Group members Other services providing assurance Other non-audit services Total Ernst & Young Network Audit based on statutory provisions Other services providing assurance Tax consulting services Other non-audit services Total 2022 In thousand EUR 458 738 1,120 1,805 426 4,547 2022 In thousand EUR 2,354 - 209 1,015 3,578 2021 458 659 1,050 1,575 316 4,058 2021 1,788 - 29 209 2,026 INTEGRATED ANNUAL REPORT 2022 439 OTP BANK IFRS REPORT (CONSOLIDATED) NOTE 35: INCOME TAXES (in HUF mn) The Group is presently liable for income tax at rates between 9% and 35% of taxable income. Deferred tax is calculated at the income tax rate of 9% in Hungary and Montenegro, 10% in Bulgaria, 12% in Moldova, 15% in Serbia and Albania, 16% in Romania, 18% in Ukraine and Croatia, 19% in Slovenia, 20% in Russia, 25.5% in the Netherlands and 35% in Malta. The breakdown of the income tax expense is: Current tax expense Deferred tax (income) / expense Total A reconciliation of the net deferred tax asset/liability is as follows: Balance as at 1 January Deferred tax income / (expense) in profit or loss Deferred tax receivable related to items recognized directly in equity and in Comprehensive Income Due to acquisition of subsidiary Foreign currency translation difference Closing balance A breakdown of the deferred tax assets are as follows: Loss allowance on granted loans Provision for off-balance sheet commitments and contingent liabilities, derivative financial instruments Securities at amortized cost Difference in depreciation of tangible assets Fair value adjustment of non-trading instruments mandatorily at fair value though profit or loss Fair value adjustment of derivative financial instruments Provision on other financial, non-financial liabilities Difference in accounting for leases Fair value adjustment of securities at fair value through other comprehensive income Unused tax allowance Loss allowance / impairment on other financial, non-financial assets Tax accrual caused by negative taxable income Difference in depreciation of right-of-use assets Loss allowance on investment Fair value adjustment of securities at fair value through profit or loss Difference in accounting for investment properties Amounts unenforceable by tax law Other Deferred tax asset 2022 91,537 (32,286) 59,251 2022 (8,936) 32,286 14,591 - (2,614) 35,327 2022 13,244 7,668 8 1,304 214 7,227 564 430 7,563 12,103 159 19,744 564 84 4,023 51 32 477 75,459 2021 65,692 6,431 72,123 2021 (3,673) (6,431) 1,294 (737) 611 (8,936) 2021 8,244 7,688 9 3,636 256 992 1,073 999 202 - 2,427 152 214 77 95 4 - 3,980 30,048 INTEGRATED ANNUAL REPORT 2022 440 OTP BANK IFRS REPORT (CONSOLIDATED) NOTE 35: INCOME TAXES (in HUF mn) [continued] A breakdown of the deferred tax liabilities are as follows: Difference in depreciation of tangible assets Fair value adjustment of securities at fair value through other comprehensive income Fair value adjustment of securities at fair value through profit or loss Loss allowance on investment Fair value adjustment of non-trading instruments mandatorily at fair value though profit or loss Securities at amortized cost Provision for off-balance sheet commitments and contingent liabilities, derivative financial instruments Loss allowance on granted loans Interbank placements and receivables Fair value adjustment of derivative financial instruments Loss allowance / impairment on other financial, non-financial assets Repurchase agreement and security lending Provision on other financial, non-financial liabilities Difference in accounting for investment properties Difference in depreciation of right-of-use assets Other Deferred tax liabilities Net deferred tax asset / (liability) (amount presented in the consolidated statement of financial position) Deferred tax assets Deferred tax liabilities 2022 2021 (10,944) (10,245) (4,586) - (1,293) (25) (959) (639) (4,383) (1,269) - (91) (265) - (204) (272) (15,202) (40,132) 2022 35,327 75,421 (40,094) (6,569) (2,781) (1,142) - (210) (559) (944) (491) (214) (2,261) - (1,875) (186) - (11,507) (38,984) 2021 (8,936) 15,109 (24,045) Among deferred tax assets the tax accruals are included the following accruals by entities: Tax accrual caused by negative 2022 2021 taxable income OTP Bank Merkantil Bank Ltd. OTP Real Estate Leasing Ltd. Nagisz Ltd. Nagisz Ltd. Nagisz Ltd. 19,424 - 142 55 56 67 19,744 - 40 55 - - 57 152 Date until it can be used 31 December 2027 31 December 2030 31 December 2030 31 December 2025 31 December 2026 31 December 2030 INTEGRATED ANNUAL REPORT 2022 441 OTP BANK IFRS REPORT (CONSOLIDATED) NOTE 35: INCOME TAXES (in HUF mn) [continued] A reconciliation of the income tax income / expense is as follows: Profit before income tax Income tax expense at statutory tax rates Income tax adjustments due to permanent differences are as follows: Deferred use of tax allowance Tax effect of transaction costs related to share-based payment recognized directly in shareholders' equity Reversal of statutory general provision Permanent differences from unused tax losses Tax effect of transaction costs related to treasury share transaction recognized directly in shareholders' equity Amounts unenforceable by tax law Use of tax allowance in the current year Other Income tax expense Effective tax rate Business tax and innovation contribution Total income tax expense Net current tax liability (amount presented in the consolidated statement of financial position) Current income tax receivables Current income tax payable 2022 394,888 53,933 (12,102) - (5) (1,894) 267 61 (23) (2,804) 37,433 9.48% 21,818 59,251 2022 (23,216) 5,650 (28,866) 2021 528,435 68,823 (8) 323 - (103) - (846) (4,036) (11,250) 52,903 10.01% 19,220 72,123 2021 (6,603) 29,978 (36,581) INTEGRATED ANNUAL REPORT 2022 442 OTP BANK NOTE 36: LEASES (in HUF mn) The Group as a lessee: IFRS REPORT (CONSOLIDATED) Right-of-use assets by class of underlying assets as at 31 December 2022: 2022 Property Office equipment and vehicles Total Depreciation expense of right-of-use assets Additions to right-of-use assets Carrying amount of right-of-use assets at the end of the reporting period 17,680 19,416 56,842 328 1,931 2,095 18,008 21,347 58,937 Right-of-use assets by class of underlying assets as at 31 December 2021: 2021 Property Office equipment and vehicles Total Depreciation expense of right-of-use assets Additions to right-of-use assets Carrying amount of right-of-use assets at the end of the reporting period 15,710 13,915 50,265 355 245 461 16,065 14,160 50,726 The total cash outflow for leases was HUF 31,872 million as at 31 December 2022 and HUF 19,663 million as at 31 December 2021. The Group mainly leases real estate, a significant part of its right-of-use assets are related to branch offices, a smaller part to office buildings and office space. Leasing liabilities by maturities: Within one year Over one year Total Lease liabilities by payments: Arising from fixed lease payments Arising from variable lease payments Total 2022 13,757 50,021 63,778 2022 38,636 25,142 63,778 2021 11,761 41,525 53,286 2021 36,047 17,239 53,286 On 31 December 2022 and 31 December 2021 HUF 44 million and HUF 123 million is the lease payment respectively to be paid in the future due to leases not yet commenced to which the Group is committed. The future lease payment not taken into account would be HUF 4,220 million as at 31 December 2022 and would have been HUF 4,041 million as at 31 December 2021 arising from extension options if they had been taken into account. The most typical indexes/rates on which the variable lease payments depend are: Consumer Price Index, Inflation Rate, BUBOR, EURIBOR. INTEGRATED ANNUAL REPORT 2022 443 OTP BANK IFRS REPORT (CONSOLIDATED) NOTE 36: LEASES (in HUF mn) [continued] The Group as a lessee [continued]: Amounts recognized in profit and loss Interest expense on lease liabilities Expense relating to short-term leases Expense relating to leases of low value assets Expense relating to variable lease payments not included in the measurement of lease liabilities Income from subleasing right-of-use assets Gains or losses arising from sale and leaseback transactions The Group as a lessor: 2022 2,386 3,935 919 - 6 - 2021 1,556 3,885 694 - 11 - The Group’s leasing activities are most significant in Hungary, Bulgaria, Slovenia, Ukraine and Croatia. The main activity of the leasing companies is finance leasing. About half of the underlying assets are passenger cars, besides this the Group leases mainly agricultural machinery, commercial vehicles, vessels and construction machinery. The Group manages the risk associated with the rights held in the underlying assets by, inter alia, buy-back agreements, determining the residual values on level lower than future market values and registering pledge on the underlying asset. The Group as a lessor, finance lease: Amounts receivable under finance leases 2022 2021 In less than 1 year Between 1 and 2 years Between 2 and 3 years Between 3 and 4 years Between 4 and 5 years More than 5 years Total receivables from undiscounted lease payments Unguaranteed residual values Gross investment in the lease Less: unearned finance income Present value of minimum lease payments receivable Loss allowance Net investment in the lease 438,205 391,229 265,744 175,723 175,420 69,877 1,516,198 395 1,516,593 (164,710) 1,351,883 (53,131) 1,298,752 469,646 332,360 241,217 159,306 90,548 60,000 1,353,077 692 1,353,769 (141,138) 1,212,631 (30,003) 1,182,628 An analysis of the change in the gross values on finance receivables is as follows: Balance as at 1 January Additions due to new contracts Additions due to interest income and amortized fees Decrease due to write-off Decrease due to repossession of the asset Decrease due to sale Decrease due to early repayment Decrease due to regular lease payment Foreign currency translation difference Closing balance 2022 2021 1,212,631 662,694 82,181 (484) (3,616) (1,697) (77,500) (572,293) 49,967 1,351,883 1,075,742 656,055 64,168 (543) (3,174) (3,864) (59,246) (530,157) 13,650 1,212,631 INTEGRATED ANNUAL REPORT 2022 444 OTP BANK IFRS REPORT (CONSOLIDATED) NOTE 36: LEASES (in HUF mn) [continued] The Group as a lessor [continued]: The Group as a lessor, finance lease [continued]: An analysis of the change in the loss allowance on finance receivables is as follows: Balance as at 1 January Loss allowance for the period Release of loss allowance Use of loss allowance Partial write-off Decrease due to sale Foreign currency translation difference Closing balance Result from finance leases Selling profit or loss Finance income on the net investment in the lease Income relating to variable lease payments not included in the measurement of the net investment in the lease The Group as a lessor, operating lease: Amounts receivable under operating leases In less than 1 year Between 1 and 2 years Between 2 and 3 years Between 3 and 4 years Between 4 and 5 years More than 5 years Total receivables from undiscounted lease payments Result from operating leases Lease income Therein lease income relating to variable lease payments that do not depend on an index or a rate 2022 30,003 49,433 (25,020) (319) (516) (61) (389) 53,131 2022 - 78,262 - 2022 6,636 6,177 4,782 3,481 2,644 2,173 25,893 2022 11,439 - 2021 24,602 20,694 (14,918) (257) - (513) 395 30,003 2021 325 59,084 - 2021 10,383 5,172 3,527 2,704 2,019 904 24,709 2021 10,791 - INTEGRATED ANNUAL REPORT 2022 445 OTP BANK IFRS REPORT (CONSOLIDATED) NOTE 37: FINANCIAL RISK MANAGEMENT (in HUF mn) A financial instrument is any contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity. Financial instruments may result in certain risks to the Group. The most significant risks the Group faces include: 37.1. Credit risk The Group takes on exposure to credit risk which is the risk that a counter-party will be unable to pay amounts in full when due. The Group structures the levels of credit risk it undertakes by placing limits on the amount of risk accepted in relation to one borrower, or banks of borrowers, and to geographical areas and loan types. Such risks are monitored on a periodical basis and are subject to an annual or more frequent review. The exposure to any borrower including banks and brokers is further restricted by sub-limits covering on and off-balance sheet exposures and daily delivery risk limits in relation to trading items such as forward foreign exchange contracts. Actual exposures against limits are monitored daily. Exposure to credit risk is managed through regular analysis of the ability of borrowers and potential borrowers to meet interest and principal repayment obligations and by changing these lending limits when appropriate. Exposure to credit risk is managed by obtaining collateral, corporate and personal guarantees. Defining the expected credit loss on individual and collective basis On individual basis: Individually assessed are the non-retail or non- micro- and small enterprise exposure of significant amount on a stand-alone basis: • exposure in stage 3, • exposure in workout management, • purchased or originated credit-impaired instruments which are in accordance with the conditions mentioned above. The calculation of impairment must be prepared and approved by the risk management functional areas. The calculation, all relevant factors (amortized cost, original and current EIR, contracted and expected cash flows (from business and/or collateral) for the individual periods of the entire lifecycle, other essential information enforced during the valuation) and the criteria thereof (including the factors underlying the classification as stage 3) must be documented individually. The expected credit loss of the exposure equals the difference of the items’ AC (gross book value) on the valuation date and the present value of the receivable's expected cash flows discounted to the valuation date by the exposure's original effective interest rate (EIR) (calculated at the initial recognition, or in the case of variable rate, recalculated due to the last interest rate change). The estimation of the expected future cash flows should be forward looking, it must also contain the effects of the possible change of macroeconomic outlook. At least two scenarios must be used for the estimation of the expected cash flow. It should be at least one scenario in which the entity anticipates that realized cash flows will be significantly different from the contractual cash flows. Probability weights must be allocated to the individual scenarios. The estimation must reflect the probability of the occurrence and non-occurrence of the credit loss, even if the most probable result is the non-occurrence of the loss. INTEGRATED ANNUAL REPORT 2022 446 OTP BANK IFRS REPORT (CONSOLIDATED) NOTE 37: FINANCIAL RISK MANAGEMENT (in HUF mn) [continued] 37.1. Credit risk [continued] Defining the expected credit loss on individual and collective basis [continued] On collective basis: The following exposures are subject to collective assessment: retail exposure irrespective of the amount, • • micro and small enterprise exposures irrespective of the amount, • all other exposure which are insignificant on a stand-alone basis and not part of the workout management, • exposure which are not in stage 3, significant on a stand-alone basis, • purchased or originated credit-impaired instruments which are in accordance with the conditions mentioned above. In the collective impairment methodology credit risk and the change of credit risk can be correctly captured by understanding the risk characteristics of the portfolio. In order to achieve this, the main risk drivers shall be identified and used to form homogeneous segments having similar risk characteristics. The segmentation is expected to stay stable from month to month, however a regular (at least yearly) revision of the segmentation process should be set up to capture the change of risk characteristics. The segmentation must be performed separately for each parameter, since in each case different factors may have relevance. The Bank's Headquarter Group Reserve Committee stipulates the guidelines related to the collective impairment methodology at group level. In addition, it has right of agreement in respect of the risk parameters (PD -probability of default, LGD - loss given default, EAD – exposure at default) and segmentation criteria proposed by the group members. The review of the parameters must be performed at least annually, and the results should be approved by the Group Reserve Committee. Local Risk Managements are responsible for parameter estimations / updates, macroeconomic scenarios are calculated by OTP Bank Headquarter for each subsidiary and each parameter. Based on the consensus proposal of Local Risk Management and OTP Bank Headquarter, the Group Reserve Committee decides on the modification of parameters (all parameters for impairment calculation). At least on a yearly basis the impairment parameters should be back tested as well. The expected loss calculation should be forward looking, including forecasts of future economic conditions. This may be achieved by applying 3-5 different macroeconomic scenarios, which may be integrated in the PD, LGD and EAD parameters. In 2022 in Slovenia and Romania the PD parameter estimation was extended to estimate parameters based on rating categories only. The more granular estimation resulted EUR 11 million less impairment in Slovenia, while in Romania the RON 95 million impairment release outcome of the review was netted with a post model adjustment resulting neutral overall effect. INTEGRATED ANNUAL REPORT 2022 447 OTP BANK IFRS REPORT (CONSOLIDATED) NOTE 37: FINANCIAL RISK MANAGEMENT (in HUF mn) [continued] 37.1. Credit risk [continued] 37.1.1. Financial instruments by stages Gross carrying amount and accumulated loss allowance of financial assets at amortized cost and of interest-bearing securities at fair value through other comprehensive income and financial commitments and provision on them by stages as at 31 December 2022: 2022 Placements with other banks Repo receivables Mortgage loans Loans to medium and large corporates Consumer loans Loans to micro and small enterprises Car-finance loans Municipal loans Loans at amortized cost Finance lease receivable Interest bearing securities at fair value through other comprehensive income 1 Securities at amortized cost Financial assets total Loan commitments given Financial guarantees given Other commitments given Financial liabilities total Gross carrying amount / Notional value Accumulated loss allowance / Provision Stage 1 Stage 2 Stage 3 POCI Total Stage 1 Stage 2 Stage 3 POCI Total Carrying amount / Exposure 1,351,082 41,009 4,433,192 1,354,832 41,250 3,975,636 6,824,520 3,199,520 5,912,383 2,879,094 63 - 373,433 996,292 363,047 594,427 512,580 530,219 16,094,458 1,298,752 460,940 433,316 515,299 14,176,668 1,045,688 114,173 82,146 20,229 1,949,320 235,817 1,699,446 4,891,938 25,376,685 4,191,766 1,447,014 559,224 6,198,004 1,642,481 4,867,061 23,127,980 3,954,773 1,378,871 509,314 5,842,958 28,285 15,141 2,228,626 258,655 80,187 20,394 359,236 24 - 161,684 202,188 388,258 64,383 20,705 746 837,964 70,050 28,680 52,785 989,503 16,660 7,515 34,805 58,980 - - 53,844 25,350 13,495 3,079 1,098 - 96,866 328 - - 97,194 201 1 - 202 1,354,919 41,250 4,564,597 7,136,213 3,643,894 642,575 537,265 536,274 17,060,818 1,351,883 1,699,446 4,934,987 26,443,303 4,230,289 1,466,574 564,513 6,261,376 3,801 241 12,638 64,479 61,424 4,710 5,751 3,187 152,189 4,797 13,754 23,675 198,457 24,124 14,678 2,755 41,557 12 - 23,738 24 - 78,932 100,793 81,256 138,877 294,251 9,136 6,830 2,212 223,965 15,241 1,040 611 240,869 11,285 2,932 904 15,121 32,558 11,199 656 556,473 32,875 24,831 18,763 632,966 3,085 1,950 1,630 6,665 - - 16,097 7,544 7,443 1,744 905 - 33,733 218 - - 33,951 29 - - 29 3,837 241 131,405 311,693 444,374 48,148 24,685 6,055 966,360 53,131 39,625 43,049 1,106,243 38,523 19,560 5,289 63,372 1 Interest bearing securities at fair value through other comprehensive income are recognized in the Consolidated statement of financial position as at fair value (see in Note 9). Loss allowances for securities at fair value through other comprehensive income that are in Stage 1 and / or in Stage 2 is recognized in the Other comprehensive income. It is included in the accumulated loss allowance of this table showed above. INTEGRATED ANNUAL REPORT 2022 448 OTP BANK IFRS REPORT (CONSOLIDATED) NOTE 37: FINANCIAL RISK MANAGEMENT (in HUF mn) [continued] 37.1. Credit risk [continued] 37.1.1. Financial instruments by stages [continued] Gross carrying amount and accumulated loss allowance of financial assets at amortized cost and of interest-bearing securities at fair value through other comprehensive income and financial commitments and provision on them by stages as at 31 December 2021: 2021 Placements with other banks Repo receivables Mortgage loans Loans to medium and large corporates Consumer loans Loans to micro and small enterprises Car-finance loans Municipal loans Loans at amortized cost Finance lease receivable Interest bearing securities at fair value through other comprehensive income 1 Securities at amortized cost Financial assets total Loan commitments given Financial guarantees given Other commitments given Financial liabilities total Gross carrying amount / Notional value Accumulated loss allowance / Provision Stage 1 Stage 2 Stage 3 POCI Total Stage 1 Stage 2 Stage 3 POCI Total Carrying amount / Exposure 1,584,861 61,052 3,822,426 1,587,827 61,342 3,173,491 5,294,170 2,963,112 4,680,180 2,585,014 - - 559,939 657,586 422,975 500,991 446,341 466,143 13,493,183 1,182,628 412,247 370,790 444,944 11,666,666 959,361 76,131 79,965 23,890 1,820,486 210,955 2,189,534 3,891,335 22,402,593 3,776,768 913,038 1,174,462 5,864,268 2,187,835 3,879,749 20,342,780 3,665,153 887,585 1,127,354 5,680,092 1,699 20,699 2,053,839 128,603 35,648 44,064 208,315 28 - 178,066 158,773 356,485 54,458 9,675 816 758,273 41,944 - - 800,245 14,805 4,568 8,260 27,633 - - 57,988 24,117 12,856 2,339 2,452 - 99,752 371 - - 100,123 211 7 - 218 1,587,855 61,342 3,969,484 5,520,656 3,377,330 545,175 462,882 469,650 14,345,177 1,212,631 2,189,534 3,900,448 23,296,987 3,808,772 927,808 1,179,678 5,916,258 2,966 290 10,450 51,724 49,104 4,751 2,988 1,372 120,389 4,432 6,566 7,789 142,432 20,539 11,814 3,170 35,523 - - 25,590 69,724 84,158 9,707 4,978 1,475 195,632 11,140 144 1,324 208,240 7,482 1,408 1,140 10,030 28 - 84,937 98,017 274,098 28,351 6,508 660 492,571 14,243 - - 506,842 3,961 1,542 906 6,409 - - 26,081 7,021 6,858 1,375 2,067 - 43,402 188 - - 43,590 22 6 - 28 2,994 290 147,058 226,486 414,218 44,184 16,541 3,507 851,994 30,003 6,710 9,113 901,104 32,004 14,770 5,216 51,990 1 Interest bearing securities at fair value through other comprehensive income are recognized in the Consolidated statement of financial position as at fair value (see in Note 9). Loss allowances for securities at fair value through other comprehensive income that are in Stage 1 and / or in Stage 2 is recognized in the Other comprehensive income. It is included in the accumulated loss allowance of this table showed above. INTEGRATED ANNUAL REPORT 2022 449 OTP BANK IFRS REPORT (CONSOLIDATED) NOTE 37: FINANCIAL RISK MANAGEMENT (in HUF mn) [continued] 37.1. Credit risk [continued] 37.1.2. Movement table of loss allowance / provision on financial instruments Movement of loss allowance on financial assets at amortized cost and on interest bearing securities at fair value through other comprehensive income and of provision of financial commitments as at 31 December 2022: 2022 Opening balance Decreases due to derecognition Transfers between stages (net) Changes due to change in credit risk (net) Changes due to modifications without derecognition (net) Decrease in loss allowance account due to write-offs Other adjustments1 Closing balance Increases due to origination and acquisition 138,017 34,558 4,457 93,238 2,647 3,117 52,749 - - 42,790 6,646 3,313 72,119 11 - 34,977 12,732 142,432 2,966 290 120,389 4,432 14,355 208,240 - - 195,632 11,140 1,468 506,842 28 - 492,571 14,243 Stage 1 Placements with other banks Repo receivables Loans at amortized cost Finance lease receivables Interest bearing securities at fair value through other comprehensive income and securities at amortized cost Stage 2 Placements with other banks Repo receivables Loans at amortized cost Finance lease receivables Interest bearing securities at fair value through other comprehensive income and securities at amortized cost Stage 3 Placements with other banks Repo receivables Loans at amortized cost Finance lease receivables Interest bearing securities at fair value through other comprehensive income and securities at amortized cost Loss allowance on financial assets subtotal (43,066) (11,574) (389) (28,281) (1,105) (1,717) (24,038) - - (22,408) (1,630) - (52,134) (14) - (49,466) (2,654) (120,475) (1,345) - (101,521) 1,668 (19,277) 9,927 1,345 - 12,796 (4,296) 82 110,548 - - 88,725 2,628 71,441 (20,902) (1,044) 56,228 (3,384) 40,543 (26,352) (1,518) - (23,558) 2,102 (3,378) 69,855 (121) - 67,932 3,374 (4,547) - - (4,576) 29 - 6,158 - - 6,174 (16) - 743 - - 743 - (88) - - (88) - (959) - - (959) - - (124,057) (4) - (122,687) (1,366) - (125,104) 14,743 98 (3,073) 16,800 510 408 15,144 185 - 13,498 1,295 166 49,050 124 - 43,678 3,918 198,457 3,801 241 152,189 4,797 37,429 240,869 12 - 223,965 15,241 1,651 632,966 24 - 556,473 32,875 1,330 78,937 43,594 1,072,292 - 857,514 24,399 262,885 - (119,238) 19,195 - (1,330) 114,944 - 2,354 1Other adjustment mainly includes changes due to foreign exchange conversion. INTEGRATED ANNUAL REPORT 2022 450 OTP BANK IFRS REPORT (CONSOLIDATED) NOTE 37: FINANCIAL RISK MANAGEMENT (in HUF mn) [continued] 37.1. Credit risk [continued] 37.1.2. Movement table of loss allowance / provision on financial instruments [continued] Movement of loss allowance on financial assets at amortized cost and on interest bearing securities at fair value through other comprehensive income and of provision of financial commitments as at 31 December 2022 [continued]: 2022 POCI Placements with other banks Repo receivables Loans at amortized cost Finance lease receivables Interest bearing securities at fair value through other comprehensive income and securities at amortized cost Loss allowance on financial assets total Loan commitments and financial guarantees given - stage 1 Loan commitments and financial guarantees given - stage 2 Loan commitments and financial guarantees given - stage 3 Loan commitments and financial guarantees given - poci Provision on financial liabilities total Opening balance Increases due to origination and acquisition Decreases due to derecognition Transfers between stages (net) Changes due to change in credit risk (net) Changes due to modifications without derecognition (net) Decrease in loss allowance account due to write-offs Other adjustments1 Closing balance 43,590 - - 43,402 188 - - - - (3,534) - - (3,434) (100) - 901,104 - 262,885 - (122,772) - - - - - - - 6,116 - - 6,098 18 - 121,060 (138) - - (138) - - 2,216 (6,610) - - (6,572) (38) (5,473) - - (5,623) 150 33,951 - - 33,733 218 - (131,714) - 73,464 - 1,106,243 35,523 22,118 (6,033) (10,309) 708 (1,368) 10,030 6,409 28 51,990 4,024 1,975 5 28,122 (2,236) (619) (9) (8,897) 6,939 3,370 - - (6,070) (4,728) 5 (10,085) 302 (156) - (1,222) - (11) (1) - (12) 918 41,557 2,143 15,121 415 - 3,476 6,665 29 63,372 1Other adjustment mainly includes changes due to foreign exchange conversion. INTEGRATED ANNUAL REPORT 2022 451 OTP BANK IFRS REPORT (CONSOLIDATED) NOTE 37: FINANCIAL RISK MANAGEMENT (in HUF mn) [continued] 37.1. Credit risk [continued] 37.1.2. Movement table of loss allowance / provision on financial instruments [continued] Movement of loss allowance on financial assets at amortized cost and on interest bearing securities at fair value through other comprehensive income and of provision of financial commitments as at 31 December 2021: 31/12/2021 Stage 1 Placements with other banks Repo receivables Loans at amortized cost Finance lease receivables Interest bearing securities at fair value through other comprehensive income and securities at amortized cost Stage 2 Placements with other banks Repo receivables Loans at amortized cost Finance lease receivables Interest bearing securities at fair value through other comprehensive income and securities at amortized cost Stage 3 Placements with other banks Repo receivables Loans at amortized cost Finance lease receivables Interest bearing securities at fair value through other comprehensive income and securities at amortized cost Loss allowance on financial assets subtotal Opening balance Modi- fication Increases due to origination and acquisition Decreases due to derecognition Transfers between stages (net) Changes due to change in credit risk (net) 123,675 1,377 292 106,151 4,141 11,714 203,173 1 - 194,941 8,103 128 476,668 111 - 463,570 12,188 799 803,516 - - - - - - - - - (1,281) - 1,281 - - - - - - - 141,894 24,635 667 109,970 2,643 3,979 29,705 - - 26,947 2,696 62 19,133 - - 17,649 1,484 (37,619) (4,383) - (29,761) (255) (3,220) (21,813) - - (21,200) (613) - (44,871) - - (43,539) (1,332) - 190,732 - (104,303) (103,930) - - (91,303) (12,106) (521) 9,826 - - 3,766 5,539 521 94,104 - - 87,537 6,567 - - 25,663 (18,854) (669) 33,215 10,426 1,545 (27,800) - - (23,004) (4,229) (567) 21,425 46 - 25,360 (3,981) - 19,288 Changes due to modifications without derecognition (net) (4,885) - - (4,442) (443) - 8,202 - 8,550 (348) - 8,856 - - 9,852 (996) - 12,173 Decrease in loss allowance account due to write-offs Other adjustments1 Closing balance (102) - - (102) - (498) (1) - (497) - - (69,523) (240) - (67,453) (1,022) (808) (70,123) (2,264) 191 - (3,339) 26 142,432 2,966 290 120,389 4,432 858 7,445 - - 7,410 (8) 43 1,050 111 - (405) 1,335 14,355 208,240 - - 195,632 11,140 1,468 506,842 28 - 492,571 14,243 9 6,231 - 857,514 1Other adjustment mainly includes changes due to foreign exchange conversion. INTEGRATED ANNUAL REPORT 2022 452 OTP BANK IFRS REPORT (CONSOLIDATED) NOTE 37: FINANCIAL RISK MANAGEMENT (in HUF mn) [continued] 37.1. Credit risk [continued] 37.1.2. Movement table of loss allowance / provision on financial instruments [continued] Movement of loss allowance on financial assets at amortized cost and on interest bearing securities at fair value through other comprehensive income and of provision of financial commitments as at 31 December 2021 [continued]: 31/12/2021 Opening balance Modi- fication Increases due to origination and acquisition Decreases due to derecognition Transfers between stages (net) Changes due to change in credit risk (net) Changes due to modifications without derecognition (net) Decrease in loss allowance account due to write-offs Other adjustments1 Closing balance POCI Placements with other banks Repo receivables Loans at amortized cost Finance lease receivables Interest bearing securities at fair value through other comprehensive income and securities at amortized cost Loss allowance on financial assets total Loan commitments and financial guarantees given - stage 1 Loan commitments and financial guarantees given - stage 2 Loan commitments and financial guarantees given - stage 3 Loan commitments and financial guarantees given - poci Provision on financial liabilities total 65,051 - - 64,881 170 - 868,567 37,297 11,055 6,458 - 54,810 - - - - - - - - - - - - 1Other adjustment mainly includes changes due to foreign exchange conversion. - - - - - (2,929) (2,929) - - - - 190,732 - (107,232) - - - - - - - (17,138) 6,004 - (23,142) - - 2,150 (129) (129) - - - (4,370) (4,370) - - - 3,105 1,424 - 1,663 18 43,590 - - 43,402 188 - 12,044 - (74,493) - 9,336 - 901,104 23,514 (5,522) 1,446 (20,069) (1,031) 3,804 932 31 28,281 (791) (2,173) (2,216) (1,337) (4) (7,654) 727 - - 196 3 (22,086) 436 (65) (1) (661) - - - - - (112) 35,523 (85) 10,030 (502) 6,409 (1) (700) 28 51,990 INTEGRATED ANNUAL REPORT 2022 453 OTP BANK IFRS REPORT (CONSOLIDATED) NOTE 37: FINANCIAL RISK MANAGEMENT (in HUF mn) [continued] 37.1. Credit risk [continued] 37.1.3. Loan portfolio by internal ratings 2022 Internal rating grade Low risk grade (1-4) Medium risk grade (5-7) High risk grade (8-9) Non-performing Total loans at amortized cost Stage 1 9,947,741 5,073,919 200,696 - Gross carrying amount Stage 3 Stage 2 POCI Total 569,504 1,033,413 582,220 - - - - 908,014 3,703 10,520,948 6,143,591 36,259 785,829 2,913 962,333 54,319 and finance lease receivable 15,222,356 2,185,137 908,014 97,194 18,412,701 2022 Internal rating grade Stage 1 Accumulated loss allowance Stage 3 Stage 2 POCI Total Low risk grade (1-4) Medium risk grade (5-7) High risk grade (8-9) Non-performing Total loans at amortized cost (66,621) (82,554) (7,811) - (51,998) (121,985) (65,223) - - - - (589,348) (172) (6,235) (250) (27,294) (118,791) (210,774) (73,284) (616,642) and finance lease receivable (156,986) (239,206) (589,348) (33,951) (1,019,491) 2021 Internal rating grade Stage 1 Gross carrying amount Stage 3 POCI Stage 2 Low risk grade (1-4) Medium risk grade (5-7) High risk grade (8-9) Non-performing Total loans at amortized cost 7,644,341 4,692,656 289,030 - 631,138 869,200 526,928 4,175 - - - 800,217 2,921 46,708 2,563 47,931 Total 8,278,400 5,608,564 818,521 852,323 and finance lease receivable 12,626,027 2,031,441 800,217 100,123 15,557,808 2021 Internal rating grade Stage 1 Accumulated loss allowance Stage 3 POCI Stage 2 Low risk grade (1-4) Medium risk grade (5-7) High risk grade (8-9) Non-performing Total loans at amortized cost 52,654 57,421 14,746 - 42,988 81,894 78,111 3,779 - - - 506,814 129 13,009 375 30,077 Total 95,771 152,324 93,232 540,670 and finance lease receivable 124,821 206,772 506,814 43,590 881,997 INTEGRATED ANNUAL REPORT 2022 454 OTP BANK IFRS REPORT (CONSOLIDATED) NOTE 37: FINANCIAL RISK MANAGEMENT (in HUF mn) [continued] 37.1. Credit risk [continued] 37.1.4. Loan portfolio by countries An analysis of the non-qualified and qualified gross loan portfolio at amortized cost, finance lease receivables, placements with other banks and repo receivables and their loss allowances by country is as follows: Country Hungary Bulgaria Croatia Serbia Romania Slovenia Russia Ukraine Montenegro France Albania Moldova Germany Belgium Austria Slovakia The Netherlands Switzerland United Kingdom United States of America Luxembourg Poland Italy Ireland Cyprus Denmark Czech Republic Canada Australia Greece Turkey Spain Israel Bosnia and Herzegovina Sweden Norway Saudi Arabia United Arab Emirates Egypt Kazakhstan Latvia Other1 Total 2022 2021 Gross amount of exposure Loss allowance Gross amount of exposure Loss allowance 5,955,212 3,537,330 2,279,085 2,127,646 1,326,510 1,200,735 1,053,208 543,159 454,567 272,848 390,856 171,616 39,631 38,855 3,182 121,591 101,078 63,843 13,833 45,232 3,477 34,012 9,330 5,966 5,311 46 739 74 58 999 1,418 1,164 937 673 542 107 87 36 726 224 50 235,946 159,412 102,039 70,779 65,646 14,627 187,610 124,859 22,421 1,171 16,660 11,181 525 134 31 545 1,864 3,138 1,336 205 1,085 987 235 116 217 7 10 4 13 122 63 35 13 97 30 9 70 26 14 9 30 5,528,516 2,972,390 1,826,233 1,729,147 1,076,696 981,307 812,070 684,030 385,342 182,850 233,391 166,720 84,164 80,434 40,426 80,117 36,858 80,611 21,209 106,347 33,251 19,203 10,558 5,375 8,646 339 899 4,823 3,164 1,808 1,810 1,095 1,174 467 810 334 239 532 582 209 46 215,911 206,233 101,067 47,085 57,665 16,244 137,920 52,678 24,930 725 10,551 5,025 675 328 201 319 622 1,701 1,763 419 1,271 239 239 106 562 16 12 16 10 192 95 25 15 76 63 23 9 30 15 15 26 2,877 19,808,870 248 1,023,569 2,783 17,207,005 164 885,281 1 Other category as at 31 December 2022 mainly includes e.g.: Japan, Macedonia, Portugal, China, Brazil, Lithuania, Republic of South- Africa, Armenia, Belorussia, Tunisia, Iran, Syria, Kosovo and other countries. INTEGRATED ANNUAL REPORT 2022 455 OTP BANK IFRS REPORT (CONSOLIDATED) NOTE 37: FINANCIAL RISK MANAGEMENT (in HUF mn) [continued] 37.1. Credit risk [continued] 37.1.4. Loan portfolio by countries [continued] Country Hungary Croatia Others Total loans at fair value 37.1.5. Loan portfolio classification by economic activities Gross loan at amortized cost and finance lease receivable portfolio by economic activities Retail Agriculture, forestry and fishing Manufacturing, mining and quarrying and other industry Construction Wholesale and retail trade, transportation and storage accommodation and food service activities Information and communication Financial and insurance activities Real estate activities Professional, scientific, technical, administration and support service activities Public administration, defence, education, human health and social work activities Other services Total gross loans and finance lease receivable 2022 2021 1,247,401 - 13 1,247,414 1,067,830 281 - 1,068,111 2022 2021 8,575,020 752,497 2,338,129 734,908 2,948,392 241,809 354,235 841,069 7,826,752 610,270 1,830,591 600,945 2,525,942 196,045 273,817 568,810 657,055 437,813 494,955 474,632 18,412,701 429,290 257,533 15,557,808 INTEGRATED ANNUAL REPORT 2022 456 OTP BANK IFRS REPORT (CONSOLIDATED) NOTE 37: FINANCIAL RISK MANAGEMENT (in HUF mn) [continued] 37.1. Credit risk [continued] 37.1.5. Loan portfolio classification by economic activities [continued] Loss allowance on loans at amortized cost and finance lease receivable by economic activities Retail Agriculture, forestry and fishing Manufacturing, mining and quarrying and other industry Construction Wholesale and retail trade, transportation and storage accommodation and food service activities Information and communication Financial and insurance activities Real estate activities Professional, scientific, technical, administration and support service activities Public administration, defence, education, human health and social work activities Other services Total loss allowance on loans and finance lease receivable 37.1.6. Collateral 2022 633,253 39,200 94,324 26,040 141,799 6,293 12,373 29,500 18,079 7,783 10,847 2021 599,650 20,118 62,951 22,165 105,934 5,117 12,945 21,363 13,464 4,828 13,462 1,019,491 881,997 The values of collateral received and held by the Group by type are as follows (total collateral). The collateral covers loans as well as off-balance sheet exposures. Types of collateral 2022 2021 Mortgages Guarantees and warranties Guarantees of state or organizations owned by state Assignments (revenue or other receivables) Securities Cash deposits Other Total 16,332,892 1,630,318 1,635,382 423,098 168,941 208,487 1,758,802 22,157,920 13,367,891 1,296,415 1,070,479 422,030 237,076 187,934 2,211,671 18,793,496 The values of collateral received and held by the Group by type are as follows (to the extent of the exposures). The collaterals cover loans as well as off-balance sheet exposures. Types of collateral 2022 2021 Mortgages Guarantees of state or organizations owned by state Guarantees and warranties Assignments (revenue or other receivables) Securities Cash deposits Other Total 8,044,836 1,241,702 1,016,672 220,062 99,345 80,313 752,241 11,455,171 6,479,871 832,432 799,775 290,066 156,715 76,338 1,295,740 9,930,937 INTEGRATED ANNUAL REPORT 2022 457 OTP BANK IFRS REPORT (CONSOLIDATED) NOTE 37: FINANCIAL RISK MANAGEMENT (in HUF mn) [continued] 37.1. Credit risk [continued] 37.1.6. Collateral [continued] The coverage level of the loan portfolio (total collateral) increased by 2.22 pps and the coverage level to the extent of the exposures also increased by 0.06 pps as at 31 December 2022. The values of collateral given and held by the Group according to which financial asset is recognized as collateral are as follows: Financial assets as collaterals recognized in the consolidated statement of financial position Cash, amounts due from banks and balances with the National Banks Placements with other banks Repo receivables Securities at fair value through other comprehensive income Securities at amortized cost Loans at amortized cost Finance lease receivables Total 37.1.7. Restructured loans 2022 2021 87,916 11,313 13,253 - 91,991 1,099,311 32,553 1,336,337 15,791 9,590 35,826 16,546 42,233 1,089,614 32,553 1,242,153 Retail mortgage loans Loans to medium and large corporations Retail consumer loans Loans to micro and small enterprises Municipal Other loans Total 2022 2021 Gross portfolio Loss allowance Gross portfolio Loss allowance 89,167 403,643 64,268 59,096 - 3,417 619,591 (5,803) (59,453) (21,346) (4,750) - (1,361) (92,713) 269,700 276,796 149,469 57,403 75 27,092 780,535 (8,779) (44,197) (32,850) (7,668) (8) (2,555) (96,057) The forborne definition used by the Group is based on EU 2015/227 regulation. Restructuring (forbearance) is a modification of the contract – initiated by either the client or the bank – that provides a concession or allowance towards the client in respect to the client’s current or future financial difficulties. The table of restructured loans contains exposures classified as performing forborne. An exposure is considered performing forborne if the conditions of the non-performing status are not met at the time of the restructuring, or the exposure fulfilled the requirements of the minimum one-year cure period as non-performing forborne. The loan volume of Hungarian entities classified as performing forborne exclusively due to moratoria participation decreased significantly due the expiration of the probation period for retail exposures (a total decrease of HUF 320 billion). This was partially offset by the increased volume of forborne exposures in Ukraine and Russia (a total increase of HUF 132 billion). INTEGRATED ANNUAL REPORT 2022 458 OTP BANK IFRS REPORT (CONSOLIDATED) NOTE 37: FINANCIAL RISK MANAGEMENT (in HUF mn) [continued] 37.1. Credit risk [continued] 37.1.8. Financial instruments by Moody’s rating categories Securities held for trading as at fair value through profit or loss 2022 Aaa Aa2 Aa3 A1 A2 A3 Baa1 Baa2 Baa3 Ba1 Ba2 Ba3 N/A Total Government bonds Equity instruments and fund units Corporate bonds Discounted Treasury bills Mortgage bonds Other interest bearing securities Other non-interest bearing securities Total 346 - - - - - 479 825 - - - - - 1 - 1 - 20 - - - - - 20 - 42 - - - - - 42 197 47 - - - - - 244 - 29 - - - - - 29 9,850 63,992 15 - - - - - 24 - 22,865 - 1,627 - 843 - 116 - - - - 9,865 88,508 959 - 39 - - - - - 39 3,669 2 - - - - - 3,671 - 4 - - - - - 4 - 78,897 163 3 31 72 385 119 22,896 72 - 1,628 274 543 753 104,750 2021 Aaa Aa3 A1 A2 A3 Baa1 Baa2 Baa3 Ba1 Ba2 B1 B3 N/A Total Government bonds Equity instruments and fund units Corporate bonds Discounted Treasury bills Mortgage bonds Other interest bearing securities Other non-interest bearing securities Total - 569 - - - - 561 1,130 - 19 - - - - - 19 - 49 - - - - - 49 16 59 - - - - - 75 - 18,747 26,024 11,282 10,156 31,306 35 485 - - - - 12 - - - - - 24 - 869 - 1,347 - 83 97 - - - - - - - - - - 2 - - - - - 520 18,759 28,264 11,462 10,156 31,308 - 6 - - - - 6 - - - 54 - - - 54 - 97,531 315 158 - 101 1,173 740 923 101 - 1,347 1,134 1,708 1,695 103,510 INTEGRATED ANNUAL REPORT 2022 459 OTP BANK IFRS REPORT (CONSOLIDATED) NOTE 37: FINANCIAL RISK MANAGEMENT (in HUF mn) [continued] 37.1. Credit risk [continued] 37.1.8. Financial instruments by Moody’s rating categories [continued] Non-trading securities mandatorily at fair value through profit or loss 2022 Aaa Aa3 A3 Baa2 Baa3 N/A Total Non-trading equity instruments mandatorily at fair value through profit or loss Non-trading debt instruments mandatorily at fair value through profit or loss Total - 949 949 - 797 797 - 6 6 8,152 1,182 9,334 - 41,594 49,746 1,006 1,006 1,469 43,063 5,409 55,155 2021 Aa3 Baa3 Ba1 N/A Total Non-trading equity instruments mandatorily at fair value through profit or loss Non-trading debt instruments mandatorily at fair value through profit or loss Total - 3,498 3,498 - 1,043 1,043 7,811 56 7,867 37,083 3,912 40,995 44,894 8,509 53,403 INTEGRATED ANNUAL REPORT 2022 460 OTP BANK IFRS REPORT (CONSOLIDATED) NOTE 37: FINANCIAL RISK MANAGEMENT (in HUF mn) [continued] 37.1. Credit risk [continued] 37.1.8. Financial instruments by Moody’s rating categories [continued] Securities at fair value through other comprehensive income 2022 Aaa Aa2 Aa3 A1 A2 A3 Baa1 Baa2 Baa3 Ba1 Ba2 B1 Caa1 Caa3 Not rated N/A Total Government bonds 19,775 6,773 Corporate bonds Mortgage bonds National Bank of Hungary bonds Interest bearing treasury bills Other securities Non-trading - - - - - - - - - - - - - - - - 17,544 24,234 80,968 138,811 534,476 120,053 10,198 157,469 105,049 145 26,597 31,672 27,415 1,301,179 42,407 - - - - - - - - 1,691 - - - - - - - - - - - 74,867 182,726 - 39,309 3,820 13,721 9,262 - - - - - - - - - - - - - - - - - - - - - - - - - 14,848 12,146 - - 3,470 - - - - - 82,651 54,553 74,867 182,726 3,470 equity instruments Total 5,767 25,542 - 6,773 3,036 3,036 388 60,339 - 24,234 - 82,659 - 138,811 323 792,392 30 159,392 - 14,018 - 171,190 - 114,311 - 145 - 26,597 30,613 92,749 - 27,415 40,157 1,739,603 2021 Aaa Aa2 Aa3 A1 A2 A3 Baa1 Baa2 Baa3 Ba1 Ba2 Ba3 B1 B3 Caa1 N/A Total Government bonds 21,728 7,849 Corporate bonds Mortgage bonds Discounted treasury bills National Bank of Hungary bonds Interest bearing treasury bills Other securities Non-trading - - - - - - - - - - - - - - - - - - - 17,808 28,492 99,425 203,172 495,231 372,198 188,395 162,477 - 47,568 - - - - - - - - - - 2,896 - - - - - - - - - - - 6,152 44,606 4,144 12,630 - 44,924 - 63,115 - - - - - - - 51,701 - - - - - - - - - - - - 109,774 - - 76,732 91,487 178 - 1,765,172 - - - - - - - - - - - - - - - - - - 18,091 15,504 - - - 3,257 88,519 63,072 96,625 109,774 63,115 3,257 equity instruments Total - 21,728 - 7,849 6,112 6,112 349 65,725 - 28,492 - 102,321 - 203,172 - 609,422 305 417,109 - 244,240 - 175,107 - 109,774 - 76,732 - 91,487 - 178 28,210 65,062 34,976 2,224,510 INTEGRATED ANNUAL REPORT 2022 461 OTP BANK IFRS REPORT (CONSOLIDATED) NOTE 37: FINANCIAL RISK MANAGEMENT (in HUF mn) [continued] 37.1. Credit risk [continued] 37.1.8. Financial instruments by Moody’s rating categories [continued] Securities at amortized cost 2022 Aaa Aa2 A1 A2 A3 Baa1 Baa2 Baa3 Ba2 B1 B3 Caa3 Not rated N/A Total Government bonds Corporate bonds Bonds of Hungarian National Bank Discounted Treasury bills Mortgage bonds Interest bearing Treasury bills Other securities Total 285,285 27,551 12,382 26,341 33,154 218,408 3,019,422 154,043 163,104 39,470 23,623 308,798 - 24,427 4,336,008 - - - - - - - - - - - - 285,285 27,551 - - - 12,966 - 1,911 27,259 - - - - - - - - - - - - - - - - - - - 15,800 177,679 - - - - - - - - 9,357 403 11,874 3,971 13,223 1,968 2,839 - - - 4,954 - - - 18,871 - - - - - - - - - 229,322 - - 11,518 - 39,274 - - - - - - 247,961 177,679 18,871 24,484 4,954 81,981 35,698 33,557 230,282 3,023,393 360,745 165,072 47,263 42,494 308,798 280,114 24,427 4,891,938 2021 Aaa Aa2 A1 A2 A3 Baa1 Baa2 Baa3 Ba1 Ba2 B1 B3 N/A Total Government bonds Corporate bonds Discounted Treasury bills Mortgage bonds Other securities Total 185,261 45,392 20,043 - - - 298 - - - - - - 12,992 - 185,559 45,392 33,035 - - - - 8,210 8,210 31,892 172,502 2,858,111 174,929 26,544 12,617 25,587 91,423 - 3,644,301 - - - - - - - - 6 - 7,343 3,682 32,013 - 47 - - - - - - - - - - - - - - 138,862 170,875 15,696 - - - 11,282 16,603 15,702 24,321 36,136 31,892 179,845 2,861,799 206,989 26,544 12,617 25,587 107,119 166,747 3,891,335 INTEGRATED ANNUAL REPORT 2022 462 OTP BANK IFRS REPORT (CONSOLIDATED) NOTE 37: FINANCIAL RISK MANAGEMENT (in HUF mn) [continued] 37.2. Maturity analysis of assets, liabilities and liquidity risk Liquidity risk is a measure of the extent to which the Group may be required to raise funds to meet its commitments associated with financial instruments. The Group maintains its liquidity position in accordance with regulations prescribed by the NBH. The essential aspect of the liquidity risk management strategy is to identify all relevant systemic and idiosyncratic sources of liquidity risk and to measure the probability and severity of such events. During liquidity risk management the Group considers the effect of liquidity risk events caused by reasons arising in the bank business line (deposit withdrawal), the national economy (exchange rate shock yield curve shock) and the global financial system (capital market shock). In line with the Group’s risk management policy liquidity risks are measured and managed on multiply hierarchy levels and applying integrated unified VaR based methodology. The basic requirement is that the Group must keep high quality liquidity reserves which means it can fulfill all liabilities when they fall due without material additional costs. The liquidity reserves can be divided in two parts. There are separate decentralized liquid asset portfolios at subsidiary level and a centralized flexible liquidity pool at a Group level. The reserves at subsidiary levels are held to cover the relevant shocks of the subsidiaries which may arise in local currencies (deposit withdrawal, local capital market shock, unexpected business expansion), while the centralized liquidity pool is held to cover the Bank’s separate shocks (deposit-, yield curve- and exchange rate shocks) and all group member’s potential shocks that may arise in foreign currencies (deposit withdrawal, capital market shock). The recalculation of shocks is made at least quarterly while the recalibration of shock measurement models and review of the risk management methodology is an annual process. The monitoring of liquidity reserves for both centralized and decentralized liquid asset portfolio has been built into the daily reporting process. Due to the balance sheet adjustment process (deleveraging) experienced in the last few years, the liquidity reserves of the Group increased significantly while the liquidity risk exposure has decreased considerably. Currently the (over)coverage of potential liquidity risk exposure by high quality liquid assets is high. There were no material changes in the liquidity risk management process for the year ended 31 December 2022. The contractual amounts disclosed in the maturity analyses are the contractual undiscounted cash-flows like gross finance lease obligations (before deducting finance charges); prices specified in forward agreements to purchase financial assets for cash; net amounts for pay-floating/receive-fixed interest rate swaps for which net cash-flows are exchanged; contractual amounts to be exchanged in a derivative financial instrument for which gross cash- flows are exchanged; gross loan commitments. Such undiscounted cash-flows differ from the amount included in the Consolidated Statement of Financial Position because the amount in that statement is based on discounted cash-flows. When the amount payable is not fixed, the amount disclosed is determined by reference to the conditions existing at the end of the reporting period. For example, when the amount payable varies with changes in an index, the amount disclosed may be based on the level of the index at the end of the period. The following tables provide an analysis of assets and liabilities about the non-discounted cash-flow into relevant maturity groupings based on the remaining period from the balance sheet date to the contractual maturity date. It is presented under the most prudent consideration of maturity dates where options or repayment schedules allow for early repayment possibilities. INTEGRATED ANNUAL REPORT 2022 463 OTP BANK IFRS REPORT (CONSOLIDATED) NOTE 37: FINANCIAL RISK MANAGEMENT (in HUF mn) [continued] 37.2. Maturity analysis of assets, liabilities and liquidity risk [continued] 2022 Within 3 months Within one year and over 3 months Within 5 years and over one year Over 5 years Without maturity Total Cash, amounts due from banks and balances with the National Banks Placements with other banks Repo receivables Trading securities at fair value through profit or loss Non-trading instruments mandatorily at fair value through profit or loss Securities at fair value through other comprehensive income Securities at amortized cost Loans at amortized cost Finance lease receivable Loans measured at fair value through profit or loss Associates and other investments Other financial assets 1 TOTAL ASSETS Amounts due to banks, the National Governments, deposits from the National Banks and other banks Repo liabilities Financial liabilities designated at fair value through profit or loss Deposits from customers Liabilities from issued securities Leasing liabilities Other financial liabilities 1 Subordinated bonds and loans TOTAL LIABILITIES 4,223,091 1,062,238 41,250 5,350 594 254,204 534,388 2,013,234 87,867 40,151 - 271,648 8,534,015 387,564 29,153 583 23,399,285 10,644 4,720 550,802 3,395 24,386,146 4 67,317 - 29,118 1,127 301,798 439,296 3,287,432 215,640 38,038 - 4,039 4,383,809 213,599 191 1,133 1,275,142 44,375 9,616 34,748 - 1,578,804 - 221,803 - 67,117 9,163 996,103 2,423,815 6,141,665 1,007,512 239,627 - 3,917 - 2,969 - 11,794 20 286,950 1,585,672 6,441,001 83,753 973,060 - 8,485 - 806 - 50 34,490 131,680 - 30,584 - - 85,929 6,726 4,223,095 1,355,133 41,250 113,429 45,394 1,970,735 4,983,171 17,913,916 1,394,772 1,290,876 85,929 294,815 11,110,722 9,393,704 290,265 33,712,515 665,930 188,025 5,535 398,900 730,703 33,534 11,065 8,603 2,042,295 296,766 - 50,218 123,290 173,510 18,397 817 291,801 954,799 - - - - - 72 4,231 - 4,303 1,563,859 217,369 57,469 25,196,617 959,232 66,339 601,663 303,799 28,966,347 NET POSITION 2 (15,852,131) 2,805,005 9,068,427 8,438,905 285,962 4,746,168 Without derivative financial instruments. 2 Analysis for net position of assets and liabilities are calculated in accordance with IFRS 7, therefore certain financial instruments are presented in the earliest period in which the Group could be required to pay. On- demand deposits are presented in the earliest (within 3 month) period category, however based on the Management’s discretion the Group has appropriate liquidity reserves as maintenance and management of liquidity risk. INTEGRATED ANNUAL REPORT 2022 464 OTP BANK IFRS REPORT (CONSOLIDATED) NOTE 37: FINANCIAL RISK MANAGEMENT (in HUF mn) [continued] 37.2. Maturity analysis of assets, liabilities and liquidity risk [continued] 2022 Within 3 months Within one year and over 3 months Within 5 years and over one year Over 5 years Without maturity Total Receivables from derivative financial instruments held for trading Liabilities from derivative financial instruments held for trading 7,242,836 (7,885,403) 1,270,841 (1,623,033) 476,343 (499,998) 186,089 (192,979) Net position of financial instruments held for trading Receivables from derivative financial instruments designated as hedge accounting Liabilities from derivative financial instruments designated as hedge accounting Net position of financial instruments designated as hedge accounting Net position of derivative financial instruments total Commitments to extend credit Bank guarantees Confirmed letters of credit Factoring loan commitment Off-balance sheet commitments (642,567) (352,192) (23,655) (6,890) 316,440 186,839 784,159 15,859 (297,714) (217,102) (2,031,727) (13,425) 18,726 (623,841) 3,937,023 602,335 47,631 414,585 5,001,574 (30,263) (382,455) (1,247,568) (1,271,223) 236,103 308,787 5,733 5,035 555,658 54,355 337,105 193 - 391,653 2,434 (4,456) 2,808 164,790 - - 167,598 - - - - - - - - - - - - 9,176,109 (10,201,413) (1,025,304) 1,303,297 (2,559,968) (1,256,671) (2,281,975) 4,230,289 1,413,017 53,557 419,620 6,116,483 INTEGRATED ANNUAL REPORT 2022 465 OTP BANK IFRS REPORT (CONSOLIDATED) NOTE 37: FINANCIAL RISK MANAGEMENT (in HUF mn) [continued] 37.2. Maturity analysis of assets, liabilities and liquidity risk [continued] 2021 Within 3 months Within one year and over 3 months Within 5 years and over one year Over 5 years Without maturity Total Cash, amounts due from banks and balances with the National Banks Placements with other banks Repo receivables Trading securities at fair value through profit or loss Non-trading instruments mandatorily at fair value through profit or loss Securities at fair value through other comprehensive income Securities at amortized cost Loans at amortized cost Finance lease receivable Loans measured at fair value through profit or loss Associates and other investments Other financial assets 1 TOTAL ASSETS Amounts due to banks, the National Governments, deposits from the National Banks and other banks Repo liabilities Financial liabilities designated at fair value through profit or loss Deposits from customers Liabilities from issued securities Leasing liabilities Other financial liabilities 1 Subordinated bonds and loans TOTAL LIABILITIES 2,557,092 1,314,523 61,373 29,714 - 295,977 34,190 1,827,131 124,074 30,164 - 130,133 6,404,371 332,330 79,045 530 19,593,347 6,702 3,060 465,022 2,886 20,482,922 51 61,455 - 21,975 - 249,131 482,530 2,599,854 307,745 31,662 - 3,244 3,757,647 173,171 - 1,253 997,565 2,664 9,058 26,311 - 1,210,022 - 145,180 - 37,345 9,769 1,114,027 2,146,652 5,897,202 770,154 221,069 - 6,265 - 67,764 - 13,530 19 544,167 1,202,747 4,742,146 48,636 835,014 - 3,270 - - - 1,738 43,615 40,798 - 136,975 - - 79,736 9,804 2,557,143 1,588,922 61,373 104,302 53,403 2,244,100 3,866,119 15,203,308 1,250,609 1,117,909 79,736 152,716 10,347,663 7,457,293 312,666 28,279,640 704,505 2 4,421 336,246 303,223 27,307 10,312 7,495 1,393,511 366,025 - 34,980 148,580 159,139 15,530 674 269,698 994,626 - - - - - - 6,235 - 6,235 1,576,031 79,047 41,184 21,075,738 471,728 54,955 508,554 280,079 24,087,316 NET POSITION 2 (14,078,551) 2,547,625 8,954,152 6,462,667 306,431 4,192,324 Without derivative financial instruments 2 Analysis for net position of assets and liabilities are calculated in accordance with IFRS 7, therefore certain financial instruments are presented in the earliest period in which the Group could be required to pay. On- demand deposits are presented in the earliest (within 3 month) period category, however based on the Management’s discretion the Group has appropriate liquidity reserves as maintenance and management of liquidity risk. INTEGRATED ANNUAL REPORT 2022 466 OTP BANK IFRS REPORT (CONSOLIDATED) NOTE 37: FINANCIAL RISK MANAGEMENT (in HUF mn) [continued] 37.2. Maturity analysis of assets, liabilities and liquidity risk [continued] 2021 Within 3 months Within one year and over 3 months Within 5 years and over one year Over 5 years Without maturity Total Receivables from derivative financial instruments held for trading Liabilities from derivative financial instruments held for trading 4,396,050 (4,349,598) 1,993,311 (1,991,763) 302,924 (296,648) 151,959 (146,398) Net position of financial instruments held for trading Receivables from derivative financial instruments designated as hedge accounting Liabilities from derivative financial instruments designated as hedge accounting Net position of financial instruments designated as hedge accounting Net position of derivative financial instruments total Commitments to extend credit Bank guarantees Confirmed letters of credit Factoring loan commitment Off-balance sheet commitments 46,452 5,693 1,548 6,276 5,561 37,815 580,489 16,195 (7,765) (47,374) (595,938) (16,417) (2,072) 44,380 3,749,199 532,445 61,124 464,341 4,807,109 (9,559) (8,011) 234,503 347,448 2,937 - 584,888 (15,449) (9,173) 74,915 307,030 853 - 382,798 (222) 5,339 6,385 106,918 163 - 113,466 - - - - - - - - - - - - 6,844,244 (6,784,407) 59,837 640,192 (667,494) (27,302) 32,535 4,065,002 1,293,841 65,077 464,341 5,888,261 INTEGRATED ANNUAL REPORT 2022 467 OTP BANK IFRS REPORT (CONSOLIDATED) NOTE 37: FINANCIAL RISK MANAGEMENT (in HUF mn) [continued] 37.3. Net foreign currency position and foreign currency risk 2022 USD EUR CHF Other Total Assets Liabilities Derivative financial instruments Net position 1,092,435 (1,523,947) 9,990,818 (9,320,156) 50,641 (148,570) 9,646,119 (7,646,515) 20,780,013 (18,639,188) 499,444 67,932 1,014,423 1,685,085 161,697 63,768 (355,391) 1,644,213 1,320,173 3,460,998 2021 USD EUR CHF Other Total Assets Liabilities Derivative financial instruments Net position 1,163,960 (1,013,972) 7,661,460 (6,769,472) 88,639 (107,902) 7,677,060 (5,971,941) 16,591,119 (13,863,287) (186,774) (36,786) (371,225) 520,763 32,021 12,758 (101,951) 1,603,168 (627,929) 2,099,903 The table above provides an analysis of the main foreign currency exposures of the Group that arise in the non- functional currency of the entities constituting the Group. The remaining foreign currencies are shown within ‘Others’. ‘Others’ category contains mainly foreign currencies in RON, RSD, HRK, UAH, RUB, BGN, ALL and MDL. The Group monitors its foreign exchange position for compliance with the regulatory requirements of the National Banks and its own limit system established in respect of limits on open positions. The measurement of the open foreign currency position of the Group involves monitoring the “VaR” limit on the foreign exchange exposure of the Group. The derivative financial instruments detailed in the table above are presented at fair value. INTEGRATED ANNUAL REPORT 2022 468 OTP BANK IFRS REPORT (CONSOLIDATED) NOTE 37: FINANCIAL RISK MANAGEMENT (in HUF mn) [continued] 37.4. Interest rate risk management Interest rate risk is the risk that the value of a financial instrument will fluctuate due to changes in market interest rates. The length of time for which the rate of interest is fixed on a financial instrument, therefore, indicates to what extent it is exposed to interest rate risk. The majority of the interest-bearing assets and liabilities of the Group are structured to match either short-term assets and short-term liabilities, or long-term assets and liabilities with repricing opportunities within one year, or long-term assets and corresponding liabilities where repricing is performed simultaneously. In addition, the significant spread existing between the different types of interest-bearing assets and liabilities enables the Group to benefit from a high level of flexibility in adjusting for its interest rate matching and interest rate risk exposure. The following table presents the interest repricing periods of the assets and liabilities. Variable yield assets and liabilities have been reported in accordance with their next repricing date. Fixed income assets and liabilities have been reported in accordance with their maturity. INTEGRATED ANNUAL REPORT 2022 469 OTP BANK IFRS REPORT (CONSOLIDATED) NOTE 37: FINANCIAL RISK MANAGEMENT (in HUF mn) [continued] 37.4. Interest rate risk management [continued] As at 31 December 2022 ASSETS Within 1 month Cash, amounts due from banks and balances with the National Banks fixed rate variable rate non-interest-bearing Placements with other banks fixed rate variable rate non-interest-bearing Repo receivables fixed rate variable rate non-interest-bearing Trading instruments at fair value through profit or loss fixed rate variable rate non-interest-bearing Non-trading instruments mandatorily at fair value through profit or loss fixed rate variable rate non-interest-bearing HUF Currency 641,960 641,503 457 - 682,568 2,151 680,417 - 41,009 41,009 - - 7,171 7,156 15 - - - - - 1,166,289 1,085,631 80,658 - 345,915 239,634 106,281 - - - - - 1,234 1,234 - - - - - - Over 1 month and Within 3 months HUF Currency Over 3 months and Within 12 months HUF Currency Over 1 year and Within 2 years Over 2 years Non-interest- bearing Total Total HUF Currency HUF Currency HUF Currency HUF Currency 309 - 309 - 46,805 6,542 40,263 - - - - - 16,157 11,967 4,190 - - - - - 14,649 - 14,649 - 37,222 37,222 - - - - - - 661 661 - - - - - - - - - - 100,744 352 100,392 - - - - - 12,146 3,775 8,371 - - - - - 28,967 4,941 24,026 - 2,007 - 2,007 - - - - - 4,265 4,265 - - - - - - - - - - - - - - - - - - 21,882 21,882 - - - - - - 20,323 - 20,323 - 28 28 - - - - - - 2,436 2,436 - - - - - - - - - - - - - - - - - - 27,900 27,900 - - - - - - 14,550 - 14,550 - 22,016 22,016 - - - - - - 9,760 9,760 - - 183,201 - - 183,201 48,754 - - 48,754 - - - - 124 - - 124 - - - - 30,057 - - 30,057 2,151,144 - - 2,151,144 65,023 - - 65,023 - - - - 1,014 - - 1,014 25,098 - - 25,098 825,470 641,503 766 183,201 878,871 9,045 821,072 48,754 41,009 41,009 - - 85,380 72,680 12,576 124 30,057 - - 30,057 3,395,922 1,090,572 154,206 2,151,144 472,211 298,900 108,288 65,023 - - - - 19,370 18,356 - 1,014 25,098 - - 25,098 4,221,392 1,732,075 154,972 2,334,345 1,351,082 307,945 929,360 113,777 41,009 41,009 - - 104,750 91,036 12,576 1,138 55,155 - - 55,155 INTEGRATED ANNUAL REPORT 2022 470 OTP BANK IFRS REPORT (CONSOLIDATED) NOTE 37: FINANCIAL RISK MANAGEMENT (in HUF mn) [continued] 37.4. Interest rate risk management [continued] As at 31 December 2022 [continued] ASSETS [continued] Within 1 month Securities at fair value through other comprehensive income fixed rate variable rate non-interest-bearing Securities at amortized cost fixed rate variable rate non-interest-bearing Loans at amortized cost, net of allowance for loan losses fixed rate variable rate non-interest-bearing Finance lease receivables fixed rate variable rate non-interest-bearing Loans mandatorily at fair value through profit or loss fixed rate variable rate non-interest-bearing Fair value adjustment of derivative financial instruments fixed rate variable rate non-interest-bearing Other financial assets fixed rate variable rate non-interest-bearing HUF Currency 150,015 120,553 29,462 - 197,317 177,967 19,350 - 186,499 20,139 166,360 - 70,923 5,969 64,954 - 26,449 - 26,449 - 194,093 194,092 1 - 364,928 364,928 - - 6,653,388 1,643,455 5,009,933 - 326,963 144,070 182,893 - - - - - 1,808,603 1,687,569 121,034 - 2,217 2,217 - - 3,091,633 3,023,972 67,661 - 25,400 14,552 10,848 - Over 1 month and Within 3 months HUF Currency Over 3 months and Within 12 months HUF Currency Over 1 year and Within 2 years Over 2 years Non-interest- bearing Total Total HUF Currency HUF Currency HUF Currency HUF Currency 62,611 62,610 1 - - - - - 57,998 44,277 13,721 - 61,623 56,550 5,073 - 2,251,999 1,160,027 1,091,972 - 10,843 818 10,025 - 2,762,858 324,583 2,438,275 - 147,623 8,234 139,389 - 10,992 - 10,992 - 906,446 428,080 478,366 - 2,703 2,504 199 - - - - - 1,424,864 879,090 545,774 - 1,316 1,018 298 - 127,352 127,345 7 - 375,979 375,979 - - 77,681 14,300 63,381 - 21,539 8,971 12,568 - 70,371 - 70,371 - 485,449 271,921 213,528 - - - - - 134,675 134,675 - - 216,496 216,496 - - 1,428,579 565,806 862,773 - 183,361 36,041 147,320 - 15,327 15,327 - - 288,026 288,026 - - 38,430 11,987 26,443 - 30,106 29,796 310 - - - - - 231,141 - 231,141 - 545,738 518,869 26,869 - 712 712 - - 36,682 36,682 - - - - - - 101,052 100,597 455 - 48,565 48,565 - - 403,633 344,884 58,749 - 94,727 34,165 60,562 - - - - - 35,986 35,986 - - - - - - 278,680 278,680 - - 2,247,457 2,247,457 - - 961,205 290,461 670,744 - 217,805 207,861 9,944 - 908,461 - 908,461 - 183,664 183,664 - - - - - - 577,643 577,643 - - 1,091,547 1,090,235 1,312 - 1,116,179 1,016,774 99,405 - 182,904 75,332 107,572 - - - - - 98,654 98,654 - - 143 123 20 - 265 - - 265 - - - - 129,999 - - 129,999 194 - - 194 - - - - 28,204 - - 28,204 93,577 - - 93,577 39,892 - - 39,892 - - - - 84,008 - - 84,008 11,764 - - 11,764 - - - - 730,436 - - 730,436 136,913 - - 136,913 634,250 604,515 29,470 265 3,108,779 3,089,429 19,350 - 3,645,813 1,496,914 2,018,900 129,999 351,410 253,415 97,801 194 1,247,414 - 1,247,414 - 3,449,048 2,607,916 812,928 28,204 98,497 4,721 199 93,577 1,105,353 1,051,284 14,177 39,892 1,783,159 1,776,774 6,385 - 12,448,645 3,895,502 8,469,135 84,008 947,342 297,842 637,736 11,764 - - - - 5,927,311 4,556,571 640,304 730,436 164,484 16,405 11,166 136,913 1,739,603 1,655,799 43,647 40,157 4,891,938 4,866,203 25,735 - 16,094,458 5,392,416 10,488,035 214,007 1,298,752 551,257 735,537 11,958 1,247,414 - 1,247,414 - 9,376,359 7,164,487 1,453,232 758,640 262,981 21,126 11,365 230,490 INTEGRATED ANNUAL REPORT 2022 471 OTP BANK IFRS REPORT (CONSOLIDATED) NOTE 37: FINANCIAL RISK MANAGEMENT (in HUF mn) [continued] 37.4. Interest rate risk management [continued] As at 31 December 2022 [continued] LIABILITIES Within 1 month HUF Currency Over 1 month and Within 3 months HUF Currency Over 3 months and Within 12 months HUF Currency Over 1 year and Within 2 years Over 2 years Non-interest- bearing Total Total HUF Currency HUF Currency HUF Currency HUF Currency Amounts due to banks, the Hungarian Government, deposits from the National Bank of Hungary and other banks fixed rate variable rate non-interest-bearing Repo liabilities fixed rate variable rate non-interest-bearing Financial liabilities designated at fair value through profit or loss fixed rate variable rate non-interest-bearing Deposits from customers fixed rate variable rate non-interest-bearing Liabilities from issued securities fixed rate variable rate non-interest-bearing 17,358 12,847 4,511 - 29,145 29,143 2 - 16,575 26 16,549 - 7,466,580 1,097,639 6,368,941 - 1,878 211 1,667 - 187,834 62,086 125,748 - 188,121 5 188,116 - - - - - 13,217,695 6,265,835 6,951,860 - - - - - 27,239 27,239 - - 98 98 - - - - - - 292,239 292,239 - - 1,215 - 1,215 - 55,363 5,079 50,284 - 5 5 - - - - - - 1,746,958 1,746,958 - - 18 18 - - 109,518 109,518 - - - - - - - - - - 153,147 153,147 - - 194,515 44,390 150,125 - 80,566 70,661 9,905 - - - - - - - - - 869,141 869,141 - - 41 41 - - 71,613 71,613 - - - - - - - - - - 37,952 37,952 - - 79,497 79,497 - - 5,187 5,182 5 - - - - - - - - - 154,101 151,009 3,092 - - - - - 751,109 751,109 - - - - - - - - - - 220,222 220,222 - - 145,295 145,295 - - 42,918 42,913 5 - - - - - - - - - 189,032 189,032 - - 448,205 448,205 - - 81,757 - - 81,757 - - - - 37,616 - - 37,616 14,525 - - 14,525 - - - - 32,696 - - 32,696 - - - - - - - - 827,213 - - 827,213 18 - - 18 1,058,594 972,326 4,511 81,757 29,243 29,241 2 - 54,191 26 16,549 37,616 8,184,665 1,801,199 6,368,941 14,525 422,400 269,393 153,007 - 404,564 185,921 185,947 32,696 188,126 10 188,116 - - - - - 17,004,140 9,221,975 6,954,952 827,213 448,282 448,264 - 18 1,463,158 1,158,247 190,458 114,453 217,369 29,251 188,118 - 54,191 26 16,549 37,616 25,188,805 11,023,174 13,323,893 841,738 870,682 717,657 153,007 18 INTEGRATED ANNUAL REPORT 2022 472 OTP BANK IFRS REPORT (CONSOLIDATED) NOTE 37: FINANCIAL RISK MANAGEMENT (in HUF mn) [continued] 37.4. Interest rate risk management [continued] As at 31 December 2022 [continued] LIABILITIES [continued] Within 1 month Fair value adjustment of derivative financial instruments fixed rate variable rate non-interest-bearing Leasing liabilities fixed rate variable rate non-interest-bearing Other financial liabilities fixed rate variable rate non-interest-bearing Subordinated bonds and loans fixed rate variable rate non-interest-bearing HUF Currency 2,868,787 2,783,756 85,031 - 2,005 1,905 100 - 93,677 93,668 9 - - - - - 2,091,600 1,945,423 146,177 - 9,146 8,686 460 - 36,041 35,843 198 - - - - - Over 1 month and Within 3 months HUF Currency Over 3 months and Within 12 months HUF Currency Over 1 year and Within 2 years Over 2 years Non-interest-bearing Total Total HUF Currency HUF Currency HUF Currency HUF Currency 478,930 331,253 147,677 - 2 1 1 - 2,247 1,748 499 - - - - - 1,824,450 972,676 851,774 - 1,329 408 921 - 1,735 1,735 - - 93,110 - 93,110 - 577,862 218,514 359,348 - - - - - 11 7 4 - - - - - 556,209 531,863 24,346 - 5,384 2,197 3,187 - 6,706 3,283 3,423 - 201,076 - 201,076 - 22,780 22,758 22 - 4 4 - - - - - - - - - - 36,714 36,714 - - 7,647 2,541 5,106 - 2,494 2,401 93 - - - - - 118,071 118,071 - - 1,277 1,277 - - - - - - - - - - 113,968 113,968 - - 31,084 17,244 13,840 - 2,408 2,319 89 - 7,798 7,798 - - 246,135 - - 246,135 - - - - 288,478 - - 288,478 - - - - 529,820 - - 529,820 5,900 - - 5,900 211,855 - - 211,855 - - - - 4,312,565 3,474,352 592,078 246,135 3,288 3,187 101 - 384,413 95,423 512 288,478 - - - - 5,152,761 3,600,644 1,022,297 529,820 60,490 31,076 23,514 5,900 261,239 45,581 3,803 211,855 301,984 7,798 294,186 - 9,465,326 7,074,996 1,614,375 775,955 63,778 34,263 23,615 5,900 645,652 141,004 4,315 500,333 301,984 7,798 294,186 - Net position (6,681,274) (3,560,594) 2,506,895 785,846 236,208 825,677 449,748 500,607 3,589,198 2,277,983 (154,136) 1,637,790 (53,361) 2,467,309 2,413,948 INTEGRATED ANNUAL REPORT 2022 473 OTP BANK IFRS REPORT (CONSOLIDATED) NOTE 37: FINANCIAL RISK MANAGEMENT (in HUF mn) [continued] 37.4. Interest rate risk management [continued] As at 31 December 2021 ASSETS Within 1 month HUF Currency Over 1 month and Within 3 months HUF Currency Over 3 months and Within 12 months HUF Currency Over 1 year and Within 2 years Over 2 years Non-interest- bearing Total Total HUF Currency HUF Currency HUF Currency HUF Currency Cash, amounts due from banks and balances with the National Banks fixed rate variable rate non-interest-bearing Placements with other banks fixed rate variable rate non-interest-bearing Repo receivables fixed rate variable rate non-interest-bearing Trading instruments at fair value through profit or loss fixed rate variable rate non-interest-bearing Non-trading instruments mandatorily at fair value through profit or loss fixed rate variable rate non-interest-bearing 37,712 36,376 1,336 - 435,888 271,734 164,154 - 33,638 33,638 - - 1,237 32 1,205 - - - - - 821,501 661,318 160,183 - 360,795 134,382 226,413 - 21,535 21,535 - - 7,034 7,034 - - - - - - - - - - 67,304 449 66,855 - - - - - 664 487 177 - - - - - 28,183 28,183 - - 109,822 96,918 12,904 - 5,828 5,828 - - 26,796 26,796 - - - - - - - - - - 30,509 1,007 29,502 - - - - - 2,506 2,233 273 - - - - - 12,391 12,391 - - 50,770 50,238 532 - - - - - 16,960 16,960 - - - - - - - - - - 49,632 49,632 - - - - - - 360 360 - - - - - - 6,697 6,697 - - 27,234 27,234 - - - - - - 6,634 6,634 - - - - - - - - - - 405,437 254,065 151,372 - - - - - 25,036 25,036 - - - - - - 12,423 12,423 - - 17,202 17,202 - - - - - - 13,415 13,415 - - - - - - 133,248 - - 133,248 24,415 - - 24,415 - - - - 1,770 - - 1,770 28,074 - - 28,074 1,503,880 - - 1,503,880 5,853 - - 5,853 51 - - 51 1,098 - - 1,098 25,329 - - 25,329 170,960 36,376 1,336 133,248 1,013,185 576,887 411,883 24,415 33,638 33,638 - - 31,573 28,148 1,655 1,770 28,074 - - 28,074 2,385,075 721,012 160,183 1,503,880 571,676 325,974 239,849 5,853 27,414 27,363 - 51 71,937 70,839 - 1,098 25,329 - - 25,329 2,556,035 757,388 161,519 1,637,128 1,584,861 902,861 651,732 30,268 61,052 61,001 - 51 103,510 98,987 1,655 2,868 53,403 - - 53,403 INTEGRATED ANNUAL REPORT 2022 474 OTP BANK IFRS REPORT (CONSOLIDATED) NOTE 37: FINANCIAL RISK MANAGEMENT (in HUF mn) [continued] 37.4. Interest rate risk management [continued] As at 31 December 2021 [continued] ASSETS [continued] Within 1 month Securities at fair value through other comprehensive income fixed rate variable rate non-interest-bearing Securities at amortized cost fixed rate variable rate non-interest-bearing Loans at amortized cost, net of allowance for loan losses fixed rate variable rate non-interest-bearing Finance lease receivables fixed rate variable rate non-interest-bearing Loans mandatorily at fair value through profit or loss fixed rate variable rate non-interest-bearing Fair value adjustment of derivative financial instruments fixed rate variable rate non-interest-bearing Other financial assets fixed rate variable rate non-interest-bearing HUF Currency 205,473 157,136 48,337 - 117 - 117 - 800,665 51,410 749,255 - 117,384 6,555 110,829 - 27,185 2 27,183 - 291,988 291,987 1 - 124,634 117,026 7,608 - 5,419,263 1,029,075 4,390,188 - 304,444 118,251 186,193 - 281 - 281 - 1,516,897 1,409,585 107,312 - 3,395 3,393 2 - 1,249,024 1,125,415 123,609 - 13,864 4,860 9,004 - Over 1 month and Within 3 months HUF Currency Over 3 months and Within 12 months HUF Currency Over 1 year and Within 2 years Over 2 years Non-interest- bearing Total Total HUF Currency HUF Currency HUF Currency HUF Currency 22,420 6,897 15,523 - - - - - 534,858 2,075 532,783 - 16,580 440 16,140 - 11,172 - 11,172 - 395,951 188,029 207,922 - 1,261 1,155 106 - 92,258 92,258 - - 24,325 19,513 4,812 - 1,525,057 260,668 1,264,389 - 131,417 8,408 123,009 - - - - - 937,234 551,410 385,824 - 19 13 6 - 97,202 88,628 8,574 - 365,576 365,576 - - 60,259 16,048 44,211 - 5,736 5,736 - - 73,893 - 73,893 - 680,161 574,143 106,018 - - - - - 202,157 202,157 - - 28,559 28,559 - - 1,431,981 683,927 748,054 - 161,672 37,140 124,532 - - - - - 863,886 862,177 1,709 - 212 12 200 - 40,289 40,289 - - 264,200 264,200 - - 264,434 187,209 77,225 - 20,288 20,288 - - 29,473 - 29,473 - 10,760 10,760 - - - - - - 177,681 177,681 - - 56,712 56,712 - - 410,199 374,260 35,939 - 88,194 40,715 47,479 - - - - - 57,580 57,521 59 - - - - - 362,610 395,460 (32,850) - 2,305,098 2,305,098 - - 1,636,001 942,294 693,707 - 197,583 188,967 8,616 - 926,107 - 926,107 - 221,053 221,053 - - - - - - 697,456 684,739 12,717 - 722,114 722,114 - - 1,180,170 835,327 344,843 - 137,387 64,125 73,262 - - - - - (353) - - (353) - - - - 121,187 - - 121,187 - - - - - - - - 17,693 17,681 12 - 128 103 25 - 181,110 - - 181,110 49,086 - - 49,086 35,329 - - 35,329 - - - - 109,109 - - 109,109 1,943 - - 1,943 - - - - 672,531 - - 672,531 67,951 - - 67,951 727,641 688,410 39,584 (353) 2,934,991 2,934,874 117 - 3,417,404 1,199,036 2,097,181 121,187 357,571 221,986 135,585 - 1,067,830 2 1,067,828 - 3,005,932 2,403,570 421,252 181,110 53,742 4,548 108 49,086 1,496,869 1,448,822 12,718 35,329 956,344 943,924 12,420 - 10,075,779 3,183,257 6,783,413 109,109 825,057 268,639 554,475 1,943 281 - 281 - 3,797,948 2,614,204 511,213 672,531 82,174 4,988 9,235 67,951 2,224,510 2,137,232 52,302 34,976 3,891,335 3,878,798 12,537 - 13,493,183 4,382,293 8,880,594 230,296 1,182,628 490,625 690,060 1,943 1,068,111 2 1,068,109 - 6,803,880 5,017,774 932,465 853,641 135,916 9,536 9,343 117,037 INTEGRATED ANNUAL REPORT 2022 475 OTP BANK IFRS REPORT (CONSOLIDATED) NOTE 37: FINANCIAL RISK MANAGEMENT (in HUF mn) [continued] 37.4. Interest rate risk management [continued] As at 31 December 2021 [continued] LIABILITIES Within 1 month HUF Currency Over 1 month and Within 3 months HUF Currency Over 3 months and Within 12 months HUF Currency Over 1 year and Within 2 years Over 2 years Non-interest- bearing Total Total HUF Currency HUF Currency HUF Currency HUF Currency Amounts due to banks, the Hungarian Government, deposits from the National Bank of Hungary and other banks fixed rate variable rate non-interest-bearing Repo liabilities fixed rate variable rate non-interest-bearing Financial liabilities designated at fair value through profit or loss fixed rate variable rate non-interest-bearing Deposits from customers fixed rate variable rate non-interest-bearing Liabilities from issued securities fixed rate variable rate non-interest-bearing 103,123 58,913 44,210 - 49,726 49,726 - - 20,133 - 20,133 - 7,533,566 463,512 7,070,054 - 864 211 653 - 200,292 103,240 97,052 - 29,321 29,321 - - - - - - 10,675,265 4,039,568 6,635,697 - - - - - 41,404 12,367 29,037 - - - - - - - - - 198,955 198,955 - - 8,514 - 8,514 - 56,912 23,208 33,704 - - - - - - - - - 456,849 456,849 - - - - - - 26,730 26,730 - - - - - - - - - - 94,140 92,653 1,487 - 170,732 - 170,732 - 79,200 52,310 26,890 - - - - - - - - - 735,911 735,911 - - - - - - 355,132 355,132 - - - - - - - - - - 31,975 31,975 - - - - - - 26,401 26,356 45 - - - - - - - - - 75,104 74,680 424 - 51 51 - - 616,005 615,961 44 - - - - - - - - - 248,209 248,209 - - 256,151 256,151 - - 12,724 12,724 - - - - - - - - - - 120,403 120,403 - - - - - - 35,951 - - 35,951 - - - - 21,051 - - 21,051 16,356 - - 16,356 - - - - 13,474 - - 13,474 - - - - - - - - 881,911 - - 881,911 13 - - 13 1,178,345 1,069,103 73,291 35,951 49,726 49,726 - - 41,184 - 20,133 21,051 8,123,201 1,035,304 7,071,541 16,356 436,261 256,362 179,899 - 389,003 217,838 157,691 13,474 29,321 29,321 - - - - - - 12,945,443 5,427,411 6,636,121 881,911 64 51 - 13 1,567,348 1,286,941 230,982 49,425 79,047 79,047 - - 41,184 - 20,133 21,051 21,068,644 6,462,715 13,707,662 898,267 436,325 256,413 179,899 13 INTEGRATED ANNUAL REPORT 2022 476 OTP BANK IFRS REPORT (CONSOLIDATED) NOTE 37: FINANCIAL RISK MANAGEMENT (in HUF mn) [continued] 37.4. Interest rate risk management [continued] As at 31 December 2021 [continued] LIABILITIES [continued] Within 1 month HUF Currency Over 1 month and Within 3 months HUF Currency Over 3 months and Within 12 months HUF Currency Over 1 year and Within 2 years Over 2 years Non-interest-bearing Total Total HUF Currency HUF Currency HUF Currency HUF Currency Fair value adjustment of derivative financial instruments fixed rate variable rate non-interest-bearing Leasing liabilities fixed rate variable rate non-interest-bearing Other financial liabilities fixed rate variable rate non-interest-bearing Subordinated bonds and loans fixed rate variable rate non-interest-bearing 941,607 721,374 220,233 - 916 830 86 - 117,189 117,185 4 - - - - - 1,905,033 1,714,718 190,315 - 7,401 6,948 453 - 50,063 50,046 17 - - - - - 220,057 151,795 68,262 - 353 72 281 - 2,518 907 1,611 - - - - - 1,084,185 579,964 504,221 - 1,076 435 641 - 672 564 108 - 85,551 - 85,551 - 709,948 526,007 183,941 - 483 7 476 - - - - - - - - - 870,647 868,848 1,799 - 5,359 1,757 3,602 - 479 211 268 - 186,225 - 186,225 - 12,943 12,398 545 - 892 319 573 - - - - - - - - - 54,920 54,847 73 - 4,534 2,582 1,952 - 133 133 - - - - - - 96,381 96,558 (177) - 1,011 1,011 - - - - - - - - - - 77,044 77,044 - - 24,823 17,403 7,420 - 103 67 36 - 6,514 6,514 - - 453,672 - - 453,672 - - - - 173,503 - - 173,503 - - - - 388,146 - - 388,146 6,438 - - 6,438 141,111 - - 141,111 44 - - 44 2,434,608 1,508,132 472,804 453,672 3,655 2,239 1,416 - 293,210 118,092 1,615 173,503 - - - - 4,379,975 3,295,421 696,408 388,146 49,631 29,125 14,068 6,438 192,561 51,021 429 141,111 278,334 6,514 271,776 44 6,814,583 4,803,553 1,169,212 841,818 53,286 31,364 15,484 6,438 485,771 169,113 2,044 314,614 278,334 6,514 271,776 44 Net position (5,587,533) (4,253,012) 578,409 1,195,694 313,809 890,767 278,494 669,788 4,861,168 2,556,377 (161,996) 991,937 282,351 2,051,551 2,333,902 INTEGRATED ANNUAL REPORT 2022 477 OTP BANK IFRS REPORT (CONSOLIDATED) NOTE 37: FINANCIAL RISK MANAGEMENT (in HUF mn) [continued] 37.5. Market risk The Group takes on exposure to market risks. Market risks arise from open positions in interest rate, currency and equity products, all of which are exposed to general and specific market movements. The Group applies a ‘Value- at-Risk’ (VaR) methodology to estimate the market risk of positions held and the maximum losses expected, based upon a number of assumptions for various changes in market conditions. The Management Board sets limits on the value of risk that may be accepted, which is monitored on a daily basis. (Analysis of liquidity risk, foreign currency risk and interest rate risk is detailed in Notes 37.2., 37.3. and 37.4., respectively.) 37.5.1. Market Risk sensitivity analysis The VaR risk measure estimates the potential loss in pre-tax profit over a given holding period for a specified confidence level. The VaR methodology is a statistically defined, probability-based approach that takes into account market volatilities as well as risk diversification by recognizing offsetting positions and correlations between products and markets. Risks can be measured consistently across all markets and products, and risk measures can be aggregated to arrive at a single risk number. The one-day 99% VaR number used by the Group reflects the 99% probability that the daily loss will not exceed the reported VaR. VaR methodologies are employed to calculate daily risk numbers include the historical and variance-covariance approach. The diversification effect has not been validated among the various market risk types when capital calculation happens. In addition to these two methodologies, Monte Carlo simulations are applied to the various portfolios on a monthly basis to determine potential future exposure. The VaR of the trading portfolio can be summarized as follows (in HUF mn): Historical VaR (99%, one-day) by risk type Foreign exchange Interest rate Equity instruments Diversification Total VaR exposure Average VaR 2022 5,896 890 42 - 6,829 2021 1,691 212 20 - 1,923 The table above shows the VaR figures by asset classes. Since processes driving the value of the major asset classes are not independent (for example the depreciation of HUF against the EUR mostly coincide with the increase of the yields of Hungarian Government Bonds), a diversification impact emerges, so the overall VaR is less than the sum of the VaR of each individual asset class. While VaR captures the Group’s daily exposure to currency and interest rate risk, sensitivity analysis evaluates the impact of a reasonably possible change in interest or foreign currency rates over a year. The longer time frame of sensitivity analysis complements VaR and helps the Group to assess its market risk exposures. Details of sensitivity analysis for foreign currency risk are set out in Note 37.5.2., for interest rate risk in Note 37.5.3., and for equity price sensitivity analysis in Note 37.5.4. INTEGRATED ANNUAL REPORT 2022 478 OTP BANK IFRS REPORT (CONSOLIDATED) NOTE 37: FINANCIAL RISK MANAGEMENT (in HUF mn) [continued] 37.5. Market risk [continued] 37.5.2. Foreign currency sensitivity analysis The Bank changed its methodology of foreign currency sensitivity analysis and has been using a historical VaR calculation since 31 March 2021. The former Monte Carlo simulation represented the Group’s sensitivity to the rise and fall in the HUF exchange rate against EUR, over a 3-month period. The sensitivity analysis included only outstanding foreign currency denominated monetary items as strategic open positions related to foreign activities. In line with the Management's intention, the former EUR (310) million strategic open position was fully closed as at 31 March 2021. Since the closing of the strategic open position, the Group has been using a historical VaR calculation with a 1 day holding period. The analysis includes the same net open foreign exchange position as used under the internal capital adequacy assessment process (ICAAP). The VaR methodology is a statistically defined, probability-based approach that takes into account market volatilities as well as risk diversification by recognizing offsetting positions and correlations between products and markets. Additionally, the Bank determines the foreign currency risk of assets evaluated through the Other Comprehensive Income, which includes securities valuated on fair value through other comprehensive income and the foreign currency translation reserves. The following table shows the result of the foreign currency sensitivity analysis. The numbers below indicate the expected daily profit or loss of the portfolio beside the given confidence level. Probability 1% 5% 25% 50% 25% 5% 1% Effects to the Consolidated Statement of Profit or Loss In HUF million Effects to the Consolidated Statement of Other Comprehensive Income In HUF million 2022 2021 2022 2021 (4,746) (2,542) (843) (15) 990 2,837 4,245 (194) (132) (50) (1) 53 142 221 (5,604) (2,992) (1,190) (235) 834 2,415 4,767 (1,707) (1,038) (398) 98 531 1,215 1,509 Note: (1) Historical VaR simulation is based on the empirical distribution of the historical exchange rate movements between 31 December 2021 and 2022. INTEGRATED ANNUAL REPORT 2022 479 OTP BANK IFRS REPORT (CONSOLIDATED) NOTE 37: FINANCIAL RISK MANAGEMENT (in HUF mn) [continued] 37.5. Market risk [continued] 37.5.3. Interest rate sensitivity analysis The sensitivity analyses below have been determined based on the exposure to interest rates for both derivatives and non-derivative instruments at the balance sheet date. The analysis is prepared assuming the amount of assets and liabilities outstanding at the balance sheet date was outstanding for the whole year. The analysis was prepared by assuming only adverse interest rate changes. The main assumptions were as follows: • Floating rate assets and liabilities were repriced to the modelled benchmark yields at the repricing dates assuming the unchanged margin compared to the last repricing. • Fixed rate assets and liabilities were repriced at the contractual maturity date. • As for liabilities with discretionary repricing feature by the Bank were assumed to be repriced with two- weeks delay, assuming no change in the margin compared to the last repricing date. • Deposits with an interest rate lower than 0.3% even at high market rates were assumed to be unchanged for the whole period. The sensitivity of interest income to changes in BUBOR was analysed by assuming two interest rate path scenarios: (1) BUBOR increases gradually by 100 bps over the next year (probable scenario) (2) BUBOR decreases gradually by 50 bps over the next year (alternative scenario) The net interest income in a one-year period after 1 January 2023 would be decreased by HUF (9,002) million (probable scenario) and increased by HUF 4,306 million (alternative scenario) as a result of these simulation. A similar simulation indicated HUF 1,487 million increase (probable scenario) and HUF (1,025) million (alternative scenario) decrease in the Net interest income in a one-year period after 1 January 2022. This effect is further enhanced by capital results HUF (350) million (for probable scenario) and HUF 181 million (for alternative scenario) as at 31 December 2022, the comparative results were (HUF (619) million for probable scenario, HUF 322 million for alternative scenario as at 31 December 2021) on the government bond portfolio held for hedging (economic). Furthermore, the effects of an instant 10bps parallel shift of the HUF, EUR and USD yield-curves on net interest income over a one-year period and on the market value of the hedge government bond at fair value through other comprehensive income portfolio booked against capital was analysed. The results can be summarized as follows (in HUF million): Description HUF (0.1%) parallel shift HUF 0.1% parallel shift EUR (0.1%) parallel shift USD (0.1%) parallel shift USD 0.1% parallel shift 2022 2021 Effects to the net interest income Effects to capital Effects to the net interest income Effects to capital 1,669 (1,667) (3,661) 119 (290) 36 (36) - - - (105) 44 (1,989) (257) 85 64 (64) - - - INTEGRATED ANNUAL REPORT 2022 480 OTP BANK IFRS REPORT (CONSOLIDATED) NOTE 37: FINANCIAL RISK MANAGEMENT (in HUF mn) [continued] 37.5. Market risk [continued] 37.5.4. Equity price sensitivity analysis The following table shows the effect of the equity price sensitivity. The Group uses VaR calculation with 1 day holding period and a 99% confidence level. The VaR methodology is a statistically defined, probability-based approach that takes into account market volatilities as well as risk diversification by recognizing offsetting positions and correlations between products and markets. The daily loss will not exceed the reported VaR number with 99% of probability. The stress test assumes the largest price movement of the last year and calculates with it as the adverse direction. These scenarios show the loss of the portfolio when all prices change with the maximum amount of the last year. Description VaR (99%, one day, HUF million) Stress test (HUF million) 2022 15 (26) 2021 12 (21) INTEGRATED ANNUAL REPORT 2022 481 OTP BANK IFRS REPORT (CONSOLIDATED) NOTE 37: FINANCIAL RISK MANAGEMENT (in HUF mn) [continued] 37.6. Capital management Capital management The primary objective of the capital management of the Group is to ensure the prudent operation, the entire compliance with the prescriptions of the regulator for a persistent business operation and maximising the shareholder value, accompanied by an optimal financing structure. The capital management of the Group members includes the management and evaluation of the shareholders` equity and other types of funds available for hedging risks, to be recorded in the equity and all material risks to be covered by the capital. The basis of the capital management of the Group members in the short run is the continuous monitoring of their capital position, in the long run the strategic and the business planning, which includes the monitoring and forecast of the capital position. The Group members maintain the capital adequacy required by the regulatory bodies and the planned risk taking mainly by means of ensuring and developing their profitability. In the event that the planned risk level of a Group member exceeded its Core and the previously raised Supplementary capital, it ensures the prudent operation by occasional measures. A further tool in the capital management of the Bank is the dividend policy, and the transactions performed with the treasury shares. Capital adequacy The Capital Requirements Directive package (CRDIV/CRR) transposes the new global standards on banking regulation (known as the Basel III agreement) into the EU legal framework. The new rules are applied from 1 January 2014. They set stronger prudential requirements for institutions, requiring them to keep sufficient capital reserves and liquidity. This new framework makes institutions in the EU more solid and strengthens their capacity to adequately manage the risks linked to their activities and absorb any losses they may incur in doing business. The capital adequacy of the Group is supervised based on the financial statements data prepared in accordance with IFRS applying the current directives, rulings and indicators from 1 January 2014. The Group uses the standard method for determining the regulatory capital requirements of the credit risk and market risk, and parallel to that, the base indicator method, and the advanced method (“AMA”) in case of the operational risk. For international comparison purposes, the Group calculated the Regulatory capital based on IFRS data as adopted by the EU, and the consolidated Capital adequacy ratio based on this in accordance with the regulations of Basel III. The Capital adequacy ratio of the Group (IFRS) was 17.5%, the Regulatory capital was HUF 3,565,933 million and the Total regulatory capital requirement was HUF 1,632,426 million as at 31 December 2022. The same ratios calculated as at 31 December 2021 were the following: 19.1%, HUF 3,191,765 million and HUF 1,335,305 million. INTEGRATED ANNUAL REPORT 2022 482 OTP BANK IFRS REPORT (CONSOLIDATED) NOTE 37: FINANCIAL RISK MANAGEMENT (in HUF mn) [continued] 37.6. Capital management [continued] Capital adequacy [continued] Calculation on IFRS basis (in HUF million) 2022 2021 Core capital (Tier 1) = Common Equity Tier 1 (CET 1) Issued capital Reserves 1 Fair value adjustments Other capital components Non-controlling interests Treasury shares Goodwill and other intangible assets Other adjustments Additional Tier 1 (AT1) Supplementary capital (Tier 2) Subordinated bonds and loans Other issued capital components Components recognized in T2 capital issued by subsidiaries Regulatory capital Credit risk capital requirement Market risk capital requirement Operational risk capital requirement Total requirement regulatory capital Surplus capital CET 1 ratio Tier 1 ratio Capital adequacy ratio 3,277,984 2,926,882 28,000 3,154,801 (135,081) 286,963 2,485 (119,138) (170,344) 230,298 - 287,949 287,362 - 587 3,565,933 1,478,168 29,322 124,936 1,632,426 1,933,507 16.10% 16.10% 17.50% 28,000 2,896,118 (15,715) 104,326 1,996 (121,941) (183,440) 217,538 - 264,883 264,397 - 486 3,191,765 1,199,423 13,440 122,442 1,335,305 1,856,460 17.50% 17.50% 19.10% 1 The dividend amount planned to pay out / paid out is deducted from reserves. Basel III The components of the Common Equity Tier 1 capital (CET 1) are the following: Issued capital, Reserves (Retained earnings, Other reserves, Changes in the equity of subsidiaries, Net Profit for the year, Changes due to consolidation) Fair value adjustments, Other capital components, (Revaluation reserves, Share based payments, Cash-flow hedges, Net investment hedge in foreign operations), Non-controlling interest, Treasury shares, Goodwill and other Intangible assets, other adjustments (due to prudential filters, due to deferred tax receivables, due to temporary regulations). Supplementary capital (Tier 2): Subordinated loan capital, Supplementary loan capital, Other issued capital components, Components recognized in T2 capital issued by subsidiaries. For regulatory compliance the capital adequacy ratios according to regulatory scope of consolidation are relevant. The Pillar3 Disclosure of OTP Group contains the capital adequacy ratios calculated under regulatory scope of consolidation. The Group has entirely complied with the regulatory capital requirements in the year ended as at 31 December 2022 as well as 2021. INTEGRATED ANNUAL REPORT 2022 483 OTP BANK IFRS REPORT (CONSOLIDATED) NOTE 38: TRANSFER OF FINANCIAL INSTRUMENTS (in HUF mn) Financial assets transferred but not derecognized Transferred assets Associated liabilities Transferred assets Associated liabilities Carrying amount 2022 Carrying amount 2021 Financial assets at fair value through other comprehensive income Debt securities Total Financial assets at amortized cost Debt securities Loans and advances Total Total - - - - 332,082 3,534 335,616 282,227 1,647 283,874 52,371 52,371 92,765 833 93,598 45,484 45,484 90,986 1,056 92,042 335,616 283,874 145,969 137,526 As at 31 December 2022 and 2021, the Group had an obligation from repurchase agreements (repo liability) of HUF 217,264 million and HUF 79,045 million respectively. Securities sold temporarily under repurchase agreements will continue to be recognized in the Consolidated Statement of Financial Position of the Group in the appropriate securities category. The related liability is measured at amortized cost in the Consolidated Statement of Financial Position as “Amounts due to the National Governments, to the National Banks and other banks and repo liabilities”. Financial assets transferred, derecognized with continuing involvement Financial assets which would have been derecognized but would be represented the continuing involvement are not recognized in the Consolidated Statement of Financial Position as at 31 December 2022 or as at 31 December 2021. INTEGRATED ANNUAL REPORT 2022 484 OTP BANK IFRS REPORT (CONSOLIDATED) NOTE 39: OFF-BALANCE SHEET ITEMS AND DERIVATIVE FINANCIAL INSTRUMENTS (in HUF mn) In the normal course of business, the Group becomes a party to various financial transactions that are not reflected on the Consolidated statement of financial position and are referred to as off-balance sheet financial instruments. The following represent notional amounts of these off-balance sheet financial instruments, unless stated otherwise. Contingent liabilities 2022 2021 Commitments to extend credit Guarantees arising from banking activities Factoring loan commitment Confirmed letters of credit Other Contingent liabilities and commitments total in accordance with IFRS 9 Legal disputes (disputed value) Underwriting guarantees Other Contingent liabilities and commitments total in accordance with IAS 37 Total Legal disputes 4,230,289 1,413,017 419,620 53,557 144,893 4,065,002 1,293,841 464,341 65,077 27,997 6,261,376 5,916,258 86,137 1,397 5,393 92,927 6,354,303 75,453 - 5,410 80,863 5,997,121 At the balance sheet date, the Group was involved in various claims and legal proceedings of a nature considered normal to its business. The amount of these claims and legal proceedings corresponds to the amount of claims and legal proceedings in previous years. The Group believes that the various asserted claims and litigations in which it is involved will not materially affect its financial position, future operating results or cash-flows, although no assurance can be given with respect to the ultimate outcome of any such claim or litigation. Provisions due to legal disputes were HUF 37,043 million as at 31 December 2022 and HUF 35,354 million as at 31 December 2021, respectively. (See Note 24.) Commitments to extend credit, guarantees and letters of credit The primary purpose of these instruments is to ensure that funds are available to a customer as required. Guarantees and standby letters of credit, which represent irrevocable assurances that the Group will make payments in the event that a customer cannot meet its obligations to third parties, carry the same credit risk as loans. Documentary and commercial letters of credit, which are written undertakings by the Group on behalf of a customer authorising a third party to draw drafts on the Group up to a stipulated amount under specific terms and conditions, are collateralised by the underlying shipments of goods to which they relate and therefore carry less risk than a direct borrowing. Commitments to extend credit represent unused portions of authorisations to extend credit in the form of loans, guarantees or letters of credit. With respect to credit risk on commitments to extend credit, the Group is potentially exposed to loss in an amount equal to the total unused commitments. However, the likely amount of loss is less than the total unused commitments since most commitments to extend credit are contingent upon customers maintaining specific credit standards. Guarantees, irrevocable letters of credit and undrawn loan commitments are subject to similar credit risk monitoring and credit policies as utilised in the extension of loans. The Management of the Group believes the market risk associated with guarantees, irrevocable letters of credit and undrawn loan commitments are minimal. INTEGRATED ANNUAL REPORT 2022 485 OTP BANK IFRS REPORT (CONSOLIDATED) NOTE 39: OFF-BALANCE SHEET ITEMS AND DERIVATIVE FINANCIAL INSTRUMENTS (in HUF mn) [continued] Guarantees, payment undertakings arising from banking activities Payment undertaking is a promise by the Group to assume responsibility for the debt obligation of a borrower if that borrower defaults until a determined amount, until a determined date, in case of fulfilling conditions, without checking the underlying transactions. The guarantee’s liability is joint and primary with the principal, in case of payment undertaking, while the Group assumes the obligation derived from guarantee independently by the conditions established by the Group. A guarantee is most typically required when the ability of the primary obligor to perform its obligations under a contract is in question, or when there is some public or private interest which requires protection from the consequences of the principal's default or delinquency. A contract of guarantee is subject to the statute of frauds (or its equivalent local laws) which has maturity and is only enforceable if recorded in writing and signed by the surety and the principal. This means that if the beneficiary has not exercised his rights against the surety or guarantor by the deadline indicated, he automatically forfeits all his claims against the guarantor or surety. In the case of a simple surety, the beneficiary is obliged to seek recovery of the debt from the debtor, because as long as the debt is recoverable from the debtor, the guarantor can refuse to pay, whereas in the case of a cash surety, the beneficiary can also go to the guarantor immediately, there being no objection to enforcement. Derivatives The Group maintains strict control limits on net open derivative positions, that is the difference between purchase and sale contracts, regarding both the amount and the term. At any time the amount subject to credit risk is limited to the current fair value of instruments that are favourable to the Group (i.e. assets), which in relation to derivatives is only a small fraction of the contract or notional values used to express the volume of instruments outstanding. This credit risk exposure is managed as part of the overall lending limits with customers, together with potential exposures from market movements. Collateral or other security is not usually obtained for credit risk exposures on these instruments, except for trading with clients, where the Group in most of the cases requires margin deposits. INTEGRATED ANNUAL REPORT 2022 486 OTP BANK IFRS REPORT (CONSOLIDATED) NOTE 40: SHARE-BASED PAYMENTS AND EMPLOYEE BENEFITS (in HUF mn) The previously approved option program required a modification due to the introduction of the Bank Group Policy on Payments accepted in resolution of Annual General Meeting regarding to the amendment of CRD III. Directives and Act on Credit Institutions and Financial Enterprises. Key management personnel affected by the Bank Group Policy receive compensation based on performance assessment generally in the form of cash bonus and equity shares in a ratio of 50-50%. Assignment is based on OTP shares, furthermore performance-based payments are deferred in accordance with the rules of Credit Institutions Act. The Bank ensures the share-based payment part for the management personnel of the Group members. During implementation of the Remuneration Policy of the Group appeared that in case of certain foreign subsidiaries it is not possible to ensure the originally determined share-based payment because of legal reasons – incompatible with relevant EU-directives –, therefore a decision was made to cancel the share-based payment in affected countries, and virtual share-based payment – cash payment fixed to share price - was made from 2017. In case of foreign subsidiaries virtual share-based payment was made uniformly from 2021 (in the case of payments related to 2021). The quantity of usable shares for individuals calculated for settlement of share-based payment shall be determined as the ratio of the amount of share-based payment and share price determined by Supervisory Board (until the end of 2014 by Board of Directors). The value of the share-based payment at the performance assessment is determined within 10 days by Supervisory Board based on the average of the three previous trade day’s middle rate of OTP Bank’s equity shares fixed on the Budapest Stock Exchange. At the same time the conditions of discounted share-based payment are determined, and share-based payment shall contain maximum HUF 6,000 discount at the assessment date, and earnings for the shares at the payment date is maximum HUF 12,000. Employee benefits are all forms of consideration given by an entity in exchange for service rendered by employees or for the termination of employment. IAS 19 Employee Benefits shall be applied in accounting for all employee benefits, except those to which IFRS 2 Share-based Payment applies. The parameters for the share-based payment relating to ongoing years 2017-2019 by the Supervisory Board for periods of each year as follows: Year Share purchasing at a discounted price Share purchasing at a discounted price Price of remuneration exchanged to share Price of remuneration exchanged to share Exercise price Maximum earnings HUF per share for the year 2018 Share purchasing at a discounted price Exercise price Maximum earnings Price of remuneration exchanged to share for the year 2019 Exercise price Maximum earnings 2018 2019 2020 2021 2022 2023 2024 2025 2026 for the year 2017 3,000 3,500 4,000 4,000 4,000 - - - - 8,064 8,064 8,064 8,064 8,064 - - - - 10,064 10,064 10,064 10,064 10,064 - - - - - 10,413 10,413 10,413 10,913 10,913 10,913 10,913 - - 4,000 4,000 4,000 4,000 4,000 4,000 4,000 - - 12,413 12,413 12,413 12,413 12,413 12,413 12,413 - - - 9,553 9,553 9,553 9,553 9,553 9,553 9,553 - - 4,000 4,000 4,000 4,000 4,000 4,000 4,000 - - 11,553 11,553 11,553 11,553 11,553 11,553 11,553 INTEGRATED ANNUAL REPORT 2022 487 OTP BANK IFRS REPORT (CONSOLIDATED) NOTE 40: SHARE-BASED PAYMENTS AND EMPLOYEE BENEFITS (in HUF mn) [continued] The parameters for the share-based payment relating to ongoing years 2020-2021 by the Supervisory Board for periods of each year as follows: Year Share purchasing at a discounted price Share purchasing at a discounted price Price of remuneration exchanged to share Price of remuneration exchanged to share Exercise price Maximum earnings Exercise price HUF per share Maximum earnings for the year 2020 9,000 8,000 8,000 8,000 8,000 8,000 8,000 - 12,644 12,644 13,644 13,644 13,644 13,644 13,644 - 16,644 16,644 16,644 16,644 16,644 16,644 16,644 - for the year 2021 - 5,912 6,912 6,912 6,912 6,912 6,912 6,912 - 6,000 7,000 8,000 9,000 10,000 10,000 10,000 - 8,912 8,912 8,912 8,912 8,912 8,912 8,912 2021 2022 2023 2024 2025 2026 2027 20281 1Parameters of benefits for year after 2021 due in 2028 only is applicable to foreign companies and for virtual benefits. Relevant factors considered during measurement of fair value related to share-based payment as follows: Year 2017 2018 2019 2020 2021 2022 Year 2017 2018 2019 2020 2021 2022 Reference price Assumed volatility Risk-free interest rate (HUF) 1-year 2-year 3-year 4-year 5-year 6-year 7-year 9,200 10,064 12,413 11,553 16,644 8,912 21.30% 26.00% 19.20% 33.60% 28.60% 42.60% 0.10% 0.20% 0.20% 0.60% 1.00% 7.10% 0.50% 0.60% 0.70% 0.40% 1.60% 7.90% 0.70% 1.00% 0.90% 0.50% 1.80% 7.60% 1.00% 1.30% 1.10% 0.60% 1.90% 7.30% 1.30% 1.60% 1.30% 0.80% 2.00% 7.10% 1.30% 1.90% 1.40% 0.90% 2.10% 7.00% 1.30% 2.10% 1.60% 1.00% 2.10% 6.90% 1 -year 2-year Expected dividends (HUF/Share) 4-year 5-year 3-year 6-year 7-year Pricing model 219 219 252 219 371 452 219 219 290 252 321 497 252 219 333 290 357 547 290 219 383 333 393 601 334 219 440 383 432 661 384 219 507 440 475 728 442 219 583 507 523 800 Binomial Binomial Binomial Binomial Binomial Binomial INTEGRATED ANNUAL REPORT 2022 488 OTP BANK IFRS REPORT (CONSOLIDATED) NOTE 40: SHARE-BASED PAYMENTS AND EMPLOYEE BENEFITS (in HUF mn) [continued] Based on parameters accepted by Supervisory Board relating to the year 2017 effective pieces are as follows as at 31 December 2022: Approved pieces of shares Exercised until 31 December 2022 Weighted average share price at the date of exercise (in HUF) Expired pieces Exercisable as at 31 December 2022 Share purchasing period started in 2018 Remuneration exchanged to share provided in 2018 Share purchasing period started in 2019 Remuneration exchanged to share provided in 2019 Share purchasing period started in 2020 Remuneration exchanged to share provided in 2020 Share purchasing period started in 2021 Remuneration exchanged to share provided in 2021 Share purchasing period started in 2022 Remuneration exchanged to share provided in 2022 108,243 108,243 11,926 11,926 212,282 212,282 26,538 26,538 101,571 101,565 11,584 11,584 109,460 109,460 11,531 11,531 42,820 - 2,950 2,950 11,005 10,098 12,096 11,813 12,084 11,897 16,288 16,477 - 8,529 - - - - 6 - - - - - - - - - - - - - 42,820 - Based on parameters accepted by Supervisory Board relating to the year 2018 effective pieces are as follows as at 31 December 2022: Approved pieces of shares Exercised until 31 December 2022 Weighted average share price at the date of exercise (in HUF) Expired pieces Exercisable as at 31 December 2022 Share purchasing period started in 2019 Remuneration exchanged to share provided in 2019 Share purchasing period started in 2020 Remuneration exchanged to share provided in 2020 Share purchasing period started in 2021 Remuneration exchanged to share provided in 2021 Share purchasing period started in 2022 Remuneration exchanged to share provided in 2022 Share purchasing period starting in 2023 Remuneration exchanged to share applying in 2023 Remuneration exchanged to share applying in 2024 Remuneration exchanged to share applying in 2025 82,854 82,854 17,017 17,017 150,230 150,230 33,024 33,024 73,799 73,799 14,618 14,618 86,456 - 13,858 13,858 - - - - - - - - 13,843 11,829 14,294 11,897 16,314 16,468 - 8,529 - - - - - - - - - - - - - - - - - - - - - - 86,456 - 45,155 4,114 864 432 INTEGRATED ANNUAL REPORT 2022 489 OTP BANK IFRS REPORT (CONSOLIDATED) NOTE 40: SHARE-BASED PAYMENTS AND EMPLOYEE BENEFITS (in HUF mn) [continued] Based on parameters accepted by Supervisory Board relating to the year 2019 effective pieces are as follows as at 31 December 2022: Share purchasing period started in 2020 Remuneration exchanged to share provided in 2020 Share purchasing period started in 2021 Remuneration exchanged to share provided in 2021 Share purchasing period started in 2022 Remuneration exchanged to share provided in 2022 Share purchasing period starting in 2023 Remuneration exchanged to share applying in 2023 Share purchasing period starting in 2024 Remuneration exchanged to share applying in 2024 Remuneration exchanged to share applying in 2025 Remuneration exchanged to share applying in 2026 Approved pieces of shares Exercised until 31 December 2022 Weighted average share price at the date of exercise (in HUF) Expired pieces Exercisable as at 31 December 2022 91,403 91,403 22,806 22,806 201,273 201,273 30,834 30,834 12,218 11,897 16,298 17,618 - - - - - - - - 107,760 - - 1,335 106,425 10,564 10,564 8,529 - - - - - - - - - - - - - - - - - - - - - - - - - - 125,771 18,025 44,421 6,279 1,000 500 Based on parameters accepted by Supervisory Board relating to the year 2020 effective pieces are as follows as at 31 December 2022: Share purchasing period started in 2021 Remuneration exchanged to share provided in 2021 Share purchasing period started in 2022 Remuneration exchanged to share provided in 2022 Share purchasing period starting in 2023 Remuneration exchanged to share applying in 2023 Share purchasing period starting in 2024 Remuneration exchanged to share applying in 2024 Share purchasing period starting in 2025 Remuneration exchanged to share applying in 2025 Remuneration exchanged to share applying in 2026 Remuneration exchanged to share applying in 2027 Approved pieces of shares Exercised until 31 December 2022 Weighted average share price at the date of exercise (in HUF) Expired pieces 41,098 14,142 17,997 26,956 17,881 17,881 17,498 - Exercisable as at 31 December 2022 - - 83,688 - - 1,288 82,400 15,232 14,743 8,529 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 489 47,826 9,292 51,002 9,518 13,080 3,443 680 680 INTEGRATED ANNUAL REPORT 2022 490 OTP BANK IFRS REPORT (CONSOLIDATED) NOTE 40: SHARE-BASED PAYMENTS AND EMPLOYEE BENEFITS (in HUF mn) [continued] Based on parameters accepted by Supervisory Board relating to the year 2021 effective pieces are as follows as at 31 December 2022: Approved pieces of shares Exercised until 31 December 2022 Weighted average share price at the date of exercise (in HUF) Expired pieces Exercisable as at 31 December 2022 Share purchasing period started in 2022 Remuneration exchanged to share provided in 2022 Share purchasing period starting in 2023 Remuneration exchanged to share applying in 2023 Share purchasing period starting in 2024 Remuneration exchanged to share applying in 2024 Share purchasing period starting in 2025 Remuneration exchanged to share applying in 2025 Share purchasing period starting in 2026 Remuneration exchanged to share applying in 2026 Share purchasing period starting in 2027 Remuneration exchanged to share applying in 2027 60,018 59,776 10,122 242 11,028 10,708 8,537 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 320 117,276 10,824 50,829 4,942 54,324 4,942 58,222 4,942 25,305 631 Effective pieces relating to the periods starting in 2023-2027 settled during valuation of performance of year 2018- 2021, can be modified based on risk assessment and personal changes. In connection with the share-based compensation for Board of Directors and connecting compensation, shares given as a part of payments detailed above and for the year 2022 based on performance assessment accounted as equity-settled share-based transactions, HUF 2,948 million and HUF 3,589 million was recognized as expense for the year ended 31 December 2022 and 2021 respectively. Defined benefit plan Defined benefit plan is post‑employment benefit plans other than defined contribution plan. The Group's net obligation is calculated by estimating the amount of employee's future benefit based on their servicies for the current and prior periods. The future value of benefit is being discounted to present value. The Group has small number of plans and mainly in Bulgaria, Serbia, Montenegro, Croatia and Slovenia. These plans are providing retirement benefits upon pension age as lump-sum payment based either on fixed amounts or certain months of salary. These plans are unfunded consequently there are no significant plan assets associated with these plans. INTEGRATED ANNUAL REPORT 2022 491 OTP BANK IFRS REPORT (CONSOLIDATED) NOTE 40: SHARE-BASED PAYMENTS AND EMPLOYEE BENEFITS (in HUF mn) [continued] Defined benefit plan [continued] The movements of defined benefit obligation can be summarized as follows: Balance as at 1 January Current service cost Interest cost Actuarial gains from changes in demographic assumptions Actuarial gains from changes in financial assumptions Benefits paid Past service cost Other decreases (-) / increases (+) Revaluation difference Closing balance Amounts recognized in profit and loss Current service cost Net interest expense Past service cost Actuarial losses Other cost Total Maturity analysis of the present value of defined benefit obligations Within one year Within 5 years and over one year Within 10 years and over 5 years Over 10 years Total present value 2022 5,264 432 105 (110) (1,179) (271) 47 (19) 459 4,728 2022 432 105 47 (288) (129) 167 2022 575 1,285 1,470 1,398 4,728 2021 5,022 457 61 (6) (122) (225) (164) 252 (11) 5,264 2021 457 61 (164) (78) 44 320 2021 127 1,237 2,210 1,688 5,262 Actuarial assumptions Discount rate Future salary increases 2022 2021 1.80% - 6.00% 0.35% - 4.50% 0.75% - 8.00% 0.75% - 8.00% Since plan asset is not recognized in the Consolidated Financial Statements, the effect of the asset ceiling, the effect of changes in foreign exchange rates and the return on plan assets, excluding amounts included in interest accounts are also not recognized and therefore not presented. OTP Group made an insignificant amount of contribution to the defined benefit plans during the year ended 31 December 2022 and 2021. INTEGRATED ANNUAL REPORT 2022 492 OTP BANK IFRS REPORT (CONSOLIDATED) NOTE 41: RELATED PARTY TRANSACTIONS (in HUF mn) The compensation of key management personnel, such as the members of the Board of Directors, members of the Supervisory Board, key employees of the Bank and its major subsidiaries involved in the decision-making process in accordance with the compensation categories defined in IAS 24 Related Party Disclosures, is summarised below: Compensations Short-term employee benefits Share-based payment Other long-term employee benefits Termination benefits Post-employment benefits Total 2022 9,790 2,638 875 293 1 13,597 2021 8,881 3,110 743 - 112 12,846 Share based compensations to the members of the Board of Directors, Supervisory Board or key employees of the Bank and its major subsidiaries are detailed in Note 40 Share-based payments. An analysis of payment to executives of the Group related to their activity in Board of Directors and Supervisory Board is as follows: Members of Board of Directors Members of Supervisory Board Total 2022 3,049 386 3,435 2021 3,023 283 3,306 INTEGRATED ANNUAL REPORT 2022 493 OTP BANK IFRS REPORT (CONSOLIDATED) NOTE 41: RELATED PARTY TRANSACTIONS (in HUF mn) [continued] Connections with related party (key management personnel and their close family member and companies) by which line of the consolidated statement of financial position and off-balance sheet is presented: Assets Securities Loans at amortized cost (gross value) Loss allowance on loans at amortized cost Finance lease receivable Loans at fair value through profit or loss Total assets Liabilities Deposits from customers and loan liabilities Fair value adjustment of derivative financial instruments Total liabilities Other related parties 601 75,704 - - 164 76,469 2022 Associated companies Other companies Total - 23,554 - 22 - 23,576 - 4,067 - - - 4,067 601 103,325 - 22 164 104,112 Other related parties 596 111,529 (3,197) - 108 109,036 54,002 12,490 2,104 68,596 39,872 - 54,002 46 12,536 - 2,104 46 68,642 - 39,872 2021 Associated companies Other companies Total - 1,828 (669) - - 1,159 4,280 - 4,280 - 1,798 (6) - - 1,792 2,732 - 2,732 596 115,155 (3,872) - 108 111,987 46,884 - 46,884 INTEGRATED ANNUAL REPORT 2022 494 OTP BANK IFRS REPORT (CONSOLIDATED) NOTE 41: RELATED PARTY TRANSACTIONS (in HUF mn) [continued] Connections with related party (key management personnel and their close family member and companies) by which line of the consolidated statement of financial position and off-balance sheet is presented [continued]: Off-balance sheet items Undrawn line of credit Bank Guarantee Commitments and guarantees given Total off-balance sheet items Other related parties 47,522 8,455 24 56,001 2022 Associated companies Other companies Total 322 - - 322 2,209 2,652 - 4,861 50,053 11,107 24 61,184 Other related parties 30,369 6,220 - 36,589 2021 Associated companies Other companies Total 1,913 - - 1,913 1,176 551 - 1,727 33,458 6,771 - 40,229 Statement of profit or loss (turnover during the current period) Interest income Fees and commissions Interest expense Fees and commission expenses Loss allowance / Provision on loans, placements, for commitments and guarantees given Operational costs 2022 860 117 (243) (7) (29) (1,852) 2021 167 61 (13) (22) (652) (224) In the normal course of business, the Bank enters into other transactions with its unconsolidated subsidiaries of the Group, the amounts and volumes of which are not significant to these Consolidated Financial Statements taken as a whole. Related party transactions were made on terms equivalent to those that prevail in arm’s length transactions and such terms can be substantiated. INTEGRATED ANNUAL REPORT 2022 495 OTP BANK IFRS REPORT (CONSOLIDATED) NOTE 42: ACQUISITION (in HUF mn) Purchase and consolidation of subsidiaries On 6 December 2021 OTP Bank signed an acquisition agreement with Alpha International Holdings Single Member S.A. on purchasing 100% shareholding of Alpha Bank SH.A., the Albanian subsidiary of the Greek Alpha Bank S.A. The purchase price has been agreed at EUR 55 million. The financial closing of the transaction was completed on 18 July 2022. The Seller shall, on an after-tax basis, indemnify and keep indemnified OTP Bank (the Purchaser) against all losses suffered or incurred by it arising directly out of two lawsuits. The aggregate liability of the Seller for all indemnity claims shall not exceed three million euros. The Seller made a strategic decision to dispose of its Albanian subsidiary. Purchasing an entity with negative goodwill is reasoned by altogether the expected cost synergies arising from the market situation in Albania. On 31 May 2021, OTP Bank signed a share sale and purchase agreement on purchasing 100% shareholding of Nova KBM d.d. and its subsidiaries, which are 80% owned by funds managed by affiliates of Apollo Global Management, Inc. and 20% by EBRD. The financial closing of the transaction took place on 6 February 2023, after obtaining all the necessary regulatory approvals. The Nova KBM acquisition completed in February 2023 and the pending acquisition of Ipoteka Bank in Uzbekistan (expected to be financially closed in the second quarter) may substantially contribute to the consolidated profit after tax; in addition to this, the expected positive after-tax effect of one-off items to be booked in relation to the consolidation of Nova KBM (badwill, PPA, initial risk cost, etc.) might reach EUR 230 million. The fair value of the assets and liabilities acquired is as follows: Cash amounts and due from banks and balances with the National Banks Placements with other banks, repo receivables Financial assets at fair value through profit or loss Securities at fair value through other comprehensive income Loans at amortized cost Loans mandatorily at fair value through profit or loss Associates and other investments Securities at amortized cost Property and equipment Intangible assets Right-of-use assets Investment properties Derivative financial assets designated as hedge accounting Other assets Total assets Alpha Bank SH.A. (58,880) (26,500) - (46,003) (101,642) - - (3,038) (1,063) (1,391) (3,209) - - (6,852) (248,579) INTEGRATED ANNUAL REPORT 2022 496 OTP BANK IFRS REPORT (CONSOLIDATED) NOTE 42: ACQUISITION (in HUF mn) [continued] The fair value of the assets and liabilities acquired is as follows [continued]: Alpha Bank SH.A. Amounts due to the banks, the National Governments, deposits from the National Banks and other banks and repo liabilities Financial liabilities designated at fair value through profit or loss Deposits from customers Liabilities from issued securities Derivative financial liabilities held for trading Derivative financial liabilities designated as hedge accounting Leasing liabilities Other liabilities Subordinated bonds and loans Total liabilities Net assets Net assets total Non-controlling interest Negative goodwill Net cash Cash acquired on purchase Net cash paid for acquisition 1,969 - 213,400 - - - 3,346 6,089 - 224,804 (23,775) 2022 (23,775) - 3,784 (19,991) 58,880 38,889 Breakdown of the acquired entity’s income, profit / loss from the date of the acquisition: Interest income Net result Alpha Bank SH.A. 2,704 (5,920) Breakdown of the acquired entity’s income, profit / loss if the Group would have acquired from the beginning of year 2022: Alpha Bank SH.A. 6,889 (11,572) Interest income Net result With the acquisition the following shares were purchased: ALPHAALTECH1 5,720,372 Common stock 100.00% Number of shares Type Voting rights INTEGRATED ANNUAL REPORT 2022 497 OTP BANK IFRS REPORT (CONSOLIDATED) NOTE 43: SIGNIFICANT SUBSIDIARIES AND ASSOCIATES (in HUF mn) The control is established when the Group has the right and exposure over the variable positive yield of the investee but the same time put up with the consequences of the negative returns and the Group by its decisions is able to influence the extent of the yields. The Group primarily considering the following factors in the process of determining the existing of the control: - investigation of the decision-making mechanism of the entity, - authority of the Board of Directors, Supervisory Board and General meeting based on the deed of association, - existence of investments with preferential voting rights. If the control can’t be obviously determined, then it should be supposed that the control does not exist. Significant influence is presumed by the Group to exist – unless the contrary case is proven – when the Group holds 20% or more of the voting power of an investee but does not have a control. Investments in companies in which the Bank has a controlling interest are detailed below. They are fully consolidated companies and incorporated in Hungary unless otherwise stated. The Group considers a subsidiary significant when it is a financial institution or when the subsidiary contributes to the Groups’ total balance sheet with higher amount. The Bank considers the subsidiaries as cash generating units. INTEGRATED ANNUAL REPORT 2022 498 OTP BANK IFRS REPORT (CONSOLIDATED) NOTE 43: SIGNIFICANT SUBSIDIARIES AND ASSOCIATES (in HUF mn) [continued] Significant subsidiaries Name DSK Bank AD (Bulgaria) OTP Bank JSC (Ukraine) JSC “OTP Bank” (Russia) OTP banka d.d. (Croatia) OTP Bank Romania S.A. (Romania) OTP banka Srbija a.d. Novi Sad (Serbia) Crnogorska komercijalna banka a.d. (Montenegro) Banka OTP Albania SH.A. (Albania) OTP Bank S.A. (Moldova) SKB Banka d.d. Ljubljana (Slovenia) OTP Financing Malta Company Ltd. (Malta) OTP Financing Netherlands B.V. (the Netherlands) OTP Holding Ltd. (Cyprus) OTP Factoring Ltd. OTP Mortgage Bank Ltd. OTP Real Estate Ltd. Merkantil Bank Ltd. OTP Building Society Ltd. OTP Fund Management Ltd. Bank Center No. 1. Ltd. Inga Kettő Ltd. OTP Funds Servicing and Consulting Ltd. OTP Real Estate Leasing Ltd. Ownership (Direct and Indirect) 2022 2021 Activity 99.92% 100.00% 97.92% 100.00% 100.00% 100.00% 100.00% 100.00% 98.26% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 99.91% 100.00% 97.92% 100.00% 100.00% 100.00% 100.00% 100.00% 98.26% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% commercial banking services commercial banking services commercial banking services commercial banking services commercial banking services commercial banking services commercial banking services commercial banking services commercial banking services commercial banking services refinancing activities refinancing activities refinancing activities work-out mortgage lending real estate management and development finance lease housing savings and loan fund management real estate lease property management fund services real estate leasing INTEGRATED ANNUAL REPORT 2022 499 OTP BANK IFRS REPORT (CONSOLIDATED) NOTE 43: SIGNIFICANT SUBSIDIARIES AND ASSOCIATES (in HUF mn) [continued] Significant associates and joint ventures Summarized financial and non-financial information of associates which are accounted according to IAS 28 and in line with IFRS 9 as at 31 December 2022 is as follows: List of associated entities Carrying amount Ownership of OTP Bank Profit after tax Country / Headquarter Activity OTP Risk Fund I. OTP-DayOne Magvető Fund D-ÉG Thermoset Ltd 'u.l.' Company for Cash Services AD Edrone spółka z ograniczoną odpowiedzialnością NovaKid Inc. Banzai Cloud Closed Co. Plc ClodeCool Ltd Pepita.hu Closed Co. Plc Seon Holdings Ltd VCC Live Group Closed Co. Plc Cursor Insight Ltd Fabetker Ltd OneSoil Ag. Packhelp Spółka Akcyjna Phoenix Play Invest closed Co. Plc Algorithmiq Invest Closed Co. Plc NGY Propertiers Investment SRL Deligo Vision Technologies Ltd GRADUW Invest Closed Co. Plc SEH-Partner Ltd Simonyi út 20. Ingatlanhasznosító Ltd Fintech CEE Software Invest Ltd New Frontier Technology Invest SARL Mindgram sp. z.o.o 520 683 - 392 822 1,723 216 1,323 1,323 8,689 1,308 75 1 362 1,168 2,350 8,195 11,735 205 4,803 6,403 90 127 3,393 200 44.12% 22.00% 46.99% 25.00% 23.54% 4.07% 17.42% 20.15% 40.00% 19.26% 24.75% 6.75% 20.48% 3.72% 3.15% 21.69% 21.69% 14.54% 2.50% 3.81% 30.56% 47.62% 20.04% 14.01% 2.38% (52) Hungary /Budapest 13 Hungary /Budapest - Hungary / Dunaújváros 183 Bulgaria / Sofia Trusts, funds and similar financial entities Trusts, funds and similar financial entities Wholesale of hardware, plumbing and heating equipment and supplies Other financial service activities, except insurance and pension funding (516) Poland / Krakow (5,409) USA / San Francisco 267 Hungary /Budapest 1 Hungary /Budapest (157) Hungary / Szeghalom (3) UK / London (226) Hungary /Budapest n.a. UK / London 135 Hungary / Nádudvar (514) Switzerland / Zurich (3,385) Poland / Warsaw Computer programming activities Online kids English learning platform operator Computer programming activities Other education Retail sale via mail order houses or via Internet Computer programming activities Computer programming activities Computer programming activities Manufacture of concrete products for construction purposes Computer programming activities Manufacture of corrugated paper and paperboard and of containers of paper and paperboard (1) Hungary /Budapest 792 Hungary /Budapest (22,567) Romania / Bucharest (15) Hungary /Budapest 131 Hungary /Budapest n.a. Hungary /Budapest - Hungary /Debrecen n.a. Hungary /Budapest n.a. Luxemburg / Luxembourg (328) Poland / Warsaw Activities of holding companies Activities of holding companies Renting and operating of own or leased real estate Other information service activities Sale and purchase of own real estate Activities of holding companies Renting and operating of own or leased real estate Activities of holding companies Activities of holding companies Other human health activities INTEGRATED ANNUAL REPORT 2022 500 OTP BANK IFRS REPORT (CONSOLIDATED) NOTE 43: SIGNIFICANT SUBSIDIARIES AND ASSOCIATES (in HUF mn) [continued] Significant associates and joint ventures [continued] The Group made significant investments into associates during 2021. Venture capital funds under the control of the Group obtained ownership interest in Phoenix Play Invest Co.Plc, in Algorithmiq Invest Closed Co. Plc and in NGY Propertiers Investment SRL. List of associated entities Carrying amount Ownership of OTP Bank Profit after tax Country / Headquarter Activity OTP Risk Fund I. OTP-DayOne Magvető Fund D-ÉG Thermoset Ltd 'u.l.' Company for Cash Services AD Edrone spółka z ograniczoną odpowiedzialnością Graboplast Closed Co. Plc NovaKid Inc. Banzai Cloud Closed Co. Plc ClodeCool Ltd Pepita.hu Closed Co. Plc Seon Holdings Ltd Starschema Ltd VCC Live Group Closed Co. Plc Virtual Solutaion Ltd Yieldigo s.r.o. Szallas.hu Closed Co. Plc1 Cursor Insight Ltd Fabetker Ltd OneSoil Ag. Packhelp Spółka Akcyjna Phoenix Play Invest closed Co. Plc Algorithmiq Invest Closed Co. Plc NGY Propertiers Investment SRL 526 288 - 392 779 700 2,006 374 1,770 516 4,756 3,944 1,672 n.a. 76 8,809 146 1 318 2,160 3,081 8,996 12,331 44.12% 22.00% 46.99% 25.00% 17.34% 7.00% 4.17% 17.42% 20.15% 34.00% 23.86% 36.19% 49.56% 8.33% 1.97% 51.19% 6.75% 20.48% 3.72% 1.00% 21.69% 21.69% 14.54% (52) Hungary /Budapest 13 Hungary /Budapest - Hungary / Dunaújváros (183) Bulgaria / Sofia Trusts, funds and similar financial entities Trusts, funds and similar financial entities Wholesale of hardware, plumbing and heating equipment and supplies Other financial service activities, except insurance and pension funding (293) Poland / Krakow n.a. Hungary / Győr (4,621) USA / San Francisco n.a. Hungary /Budapest 1 Hungary /Budapest (132) Hungary / Szeghalom (4) UK / London n.a. Hungary /Budapest (203) Hungary /Budapest n.a. Hungary /Budapest (168) Czech Republic / Prague 1,278 Hungary / Miskolc (247) UK / London 132 Hungary / Nádudvar (1,058) Switzerland / Zurich (3,038) Poland / Warsaw Computer programming activities Manufacture of builders’ ware of plastic Online kids English learning platform operator Computer programming activities Other education Retail sale via mail order houses or via Internet Computer programming activities Computer consultancy activities Computer programming activities Computer programming activities Computer programming activities Web portals Computer programming activities Manufacture of concrete products for construction purposes Computer programming activities Manufacture of corrugated paper and paperboard and of containers of paper and paperboard (1) Hungary /Budapest 792 Hungary /Budapest (22,567) Romania / Bucharest Activities of holding companies Activities of holding companies Renting and operating of own or leased real estate It does not control another entity even though it holds more than half of the voting rights. INTEGRATED ANNUAL REPORT 2022 501 OTP BANK IFRS REPORT (CONSOLIDATED) NOTE 44: TRUST ACTIVITIES (in HUF mn) The Bank acts as a trustee for certain loans granted by companies or employers to their employees, mainly for housing purposes. The ultimate risk for these loans rests with the party advancing the funds. As these loans and related funds are not considered to be assets or liabilities of the Group, they have been excluded from the accompanying Consolidated Statement of Financial Position. The amount of loans managed by the Group as a trustee 2022 37,714 2021 36,517 INTEGRATED ANNUAL REPORT 2022 502 OTP BANK IFRS REPORT (CONSOLIDATED) NOTE 45: CONCENTRATION OF ASSETS AND LIABILITIES In the percentage of the total assets Receivables from, or securities issued by the Hungarian Government or the NBH 2022 2021 14.75% 15.87% There were no other significant concentrations of the assets or liabilities of the Group either as at 31 December 2022 or as at 31 December 2021. The Group continuously provides the NBH with reports on the extent of dependency on large depositors as well as the exposure of the biggest 50 depositors towards the Group. Further to this obligatory reporting to the NBH, the Group pays particular attention on the exposure of its largest partners and cares for maintaining a closer relationship with these partners in order to secure the stability of the level of deposits. The organisational unit of the Bank in charge of partner-risk management analyses the biggest partners on a constant basis and sets limits on the Bank’s and the Group’s exposure separately partner-by-partner. If necessary, it modifies partner-limits in due course thereby reducing the room for manoeuvring of the Treasury and other business areas. The Bank’s internal regulation (Limit-management regulation) controls risk management related to exposures of clients. The Bank makes a difference between clients or clients who are economically connected with each other, partners, partners operating in the same geographical region or in the same economic sector, exposures from customers. Limit-management regulation includes a specific range provision system used by the Bank to control risk exposures. This regulation has to be used by the Bank for its business (lending) risk-taking activity both in retail and corporate sector. To specify credit risk limits Group strives their clients get an acceptable margin of risk based on their financial situation. In the Group limit system has to be provided a lower-level decision-making delegation. If a Group member takes risk against a client or group of clients (either inside the local economy or outside), the client will be qualified as a group level risk and these limits will be specified at group level. The validity period of this policy is 12 months. The limit shall be reviewed prior to the expiry date but at least once a year - based on the relevant information required to limit calculations. INTEGRATED ANNUAL REPORT 2022 503 OTP BANK IFRS REPORT (CONSOLIDATED) NOTE 46: EARNINGS PER SHARE Consolidated Earnings per share attributable to the ordinary shares of the Group are determined by dividing consolidated Net profit for the year attributable to ordinary shareholders, after the deduction of declared preference dividends, by the weighted average number of ordinary shares outstanding during the year. Dilutive potential ordinary shares are deemed to have been converted into ordinary shares. Earnings per share from continuing and discontinued operations Consolidated profit after income tax for the period attributable to ordinary shareholders (in HUF mn) Weighted average number of ordinary shares outstanding during the year for calculating basic EPS (number of share) Basic Earnings per share (in HUF) Consolidated profit after income tax for the period attributable to ordinary shareholders (in HUF mn) Modified weighted average number of ordinary shares outstanding during the year for calculating diluted EPS (number of share) 2022 2021 346,354 455,592 268,790,272 1,289 262,017,836 1,738 346,354 455,592 268,873,185 262,094,958 Diluted Earnings per share (in HUF) 1,288 1,738 Earnings per share from continuing operations 2022 2021 Consolidated profit after income tax for the period attributable to ordinary shareholders (in HUF mn) Weighted average number of ordinary shares outstanding during the year for calculating basic EPS (number of share) Basic Earnings per share (in HUF) Consolidated profit after income tax for the period attributable to ordinary shareholders (in HUF mn) Modified weighted average number of ordinary shares outstanding during the year for calculating diluted EPS (number of share) 334,910 455,476 268,790,272 1,246 262,017,836 1,738 334,910 455,476 268,873,185 262,094,958 Diluted Earnings per share (in HUF) 1,246 1,738 Earnings per share from discontinued operations Consolidated profit after income tax for the period attributable to ordinary shareholders (in HUF mn) Weighted average number of ordinary shares outstanding during the year for calculating basic EPS (number of share) Basic Earnings per share (in HUF) Consolidated profit after income tax for the period attributable to ordinary shareholders (in HUF mn) Modified weighted average number of ordinary shares outstanding during the year for calculating diluted EPS (number of share) 2022 11,444 2021 116 268,790,272 43 262,017,836 - 11,444 116 268,873,185 262,094,958 Diluted Earnings per share (in HUF) 43 - INTEGRATED ANNUAL REPORT 2022 504 OTP BANK IFRS REPORT (CONSOLIDATED) NOTE 46: EARNINGS PER SHARE [continued] Weighted average number of ordinary shares Average number of Treasury shares Weighted average number of ordinary shares outstanding during the year for calculating basic EPS Dilutive effects of options issued in accordance with the remuneration policy and convertible into ordinary shares 1 The modified weighted average number of ordinary shares outstanding during the year for calculating diluted EPS 2022 2021 280,000,010 11,209,738 280,000,010 17,982,174 268,790,272 262,017,836 82,913 77,122 268,873,185 262,094,958 Both in the year 2022 and 2021 the dilutive effect is in connection with the Remuneration Policy and the Management Option Program. INTEGRATED ANNUAL REPORT 2022 505 OTP BANK IFRS REPORT (CONSOLIDATED) NOTE 47: NET GAIN OR LOSS REALIZED ON FINANCIAL INSTRUMENTS (in HUF mn) 2022 Net interest / similar to interest gain and loss Net non- interest gain and loss Loss allowance Other Compre- hensive Income Cash, amounts due from banks and balances with the National Banks Placements with other banks Repo receivables Trading securities at fair value through profit or loss Non-trading instruments mandatorily at fair value through profit or loss Securities at fair value through other comprehensive income 1 Securities at amortized cost Loans at amortized cost Finance lease receivables Loans mandatorily at fair value through profit or loss Other financial assets 2 Derivative financial instruments 2 Total result on financial assets Amounts due to banks, the National Governments, deposits from the National Banks and other banks Repo liabilities Financial liabilities designated at fair value through profit or loss Deposits from customers Liabilities from issued securities Leasing liabilities Subordinated bonds and loans Total result on financial liabilities Total result on financial instruments 62,121 154,231 4,261 - 54 54,046 144,757 978,037 78,262 54,036 4,103 (85,909) 1,447,999 (16,315) (31,006) (562) (269,592) (27,838) (2,386) (8,986) (356,685) 1,091,314 - - - (3,151) 145 (1,014) (4,636) 32,572 - (5,951) - 10,558 28,523 - - 1,932 342,427 - - - 344,359 372,882 (375) 39 50 - - (29,273) (31,501) (167,506) (24,413) 13,346 (1,204) - (240,837) - - - - - (119,377) - - - - - - (119,377) - - - - - - - - - - (240,837) - - - - - - (119,377) For the year 2022 HUF (1,014) million net non-interest gain on securities at fair value through other comprehensive income was transferred from other comprehensive income to profit or loss. 2 Gains from other financial assets and derivative financial instruments recognized in net interest income as Income similar to interest income. INTEGRATED ANNUAL REPORT 2022 506 OTP BANK IFRS REPORT (CONSOLIDATED) NOTE 47: NET GAIN OR LOSS REALIZED ON FINANCIAL INSTRUMENTS (in HUF mn) [continued] 2021 Cash, amounts due from banks and balances with the National Banks Placements with other banks Repo receivables Trading securities at fair value through profit or loss Non-trading instruments mandatorily at fair value through profit or loss Securities at fair value through other comprehensive income 1 Securities at amortized cost Loans at amortized cost Finance lease receivables Loans mandatorily at fair value through profit or loss Other financial assets 2 Derivative financial instruments 2 Total result on financial assets Amounts due to banks, the National Governments, deposits from the National Banks and other banks Repo liabilities Financial liabilities designated at fair value through profit or loss Deposits from customers Liabilities from issued securities Leasing liabilities Subordinated bonds and loans Total result on financial liabilities Total result on financial instruments Net interest / similar to interest gain and loss Net non- interest gain and loss Loss allowance Other Compre- hensive Income 16,527 24,594 827 - 1,749 49,473 79,602 692,432 59,084 40,131 3,639 3,321 971,379 (24,249) (2,299) (493) (51,052) (9,822) (1,556) (7,598) (97,069) 874,310 - - - (952) (1,664) 12 5,016 4,812 (2,587) 1,031 26,354 - 4,459 - 9,412 48,497 - - (3,916) 267,033 - - - 263,117 311,614 - - (961) (3,013) (32,159) (5,776) (16,289) 438 - (60,364) - - - - - - - - (60,364) - - - - - (44,877) - - - - - - (44,877) - - - - - - - - (44,877) For the year of 2021 HUF (2,587) million net non-interest gain on securities at fair value through other comprehensive income was transferred from other comprehensive income to profit or loss. 2 Gains from other financial assets and derivative financial instruments recognized in net interest income as Income similar to interest income. INTEGRATED ANNUAL REPORT 2022 507 OTP BANK IFRS REPORT (CONSOLIDATED) NOTE 48: FAIR VALUE OF FINANCIAL INSTRUMENTS (in HUF mn) In determining the fair value of a financial asset or liability the Group uses the market price in the case of instruments that are quoted on an active market. In most cases market price is not publicly available, so the Group has to make assumptions or use valuation techniques to determine the fair value of a financial instrument. See Note 48.4. for more information about fair value classes applied for financial assets and liabilities measured at fair value in these financial statements. To provide a reliable estimate of the fair value of those financial instruments that are originally measured at amortized cost, the Group used the discounted cash-flow analyses (loans, placements with other banks, repo receivables, amounts due to banks, repo liabilities, deposits from customers). The fair value of issued securities and subordinated bonds is based on quoted prices (e.g. Reuters). Cash and amounts due from banks and balances with the National Banks represent amounts available immediately thus the fair value equals to the cost. The assumptions used when calculating the fair value of financial assets and liabilities when using valuation technique are the following: • • • • the discount rates are the risk-free rates related to the denomination currency adjusted by the appropriate risk premium as of the end of the reporting period, the contractual cash-flows are considered for the performing loans and for the non-performing loans, the amortized cost less impairment is considered as fair value, the future cash-flows for floating interest rate instruments are estimated from the yield curves as of the end of the reporting period, the fair value of the deposit which can be due in demand cannot be lower than the amount payable on demand. Classes of assets and liabilities not measured at fair value in the Consolidated Statement of Financial Position, the income approach was used to convert future cash-flows to a single current amount. Fair value of current assets is equal to carrying amount, fair value of liabilities from issued securities and other bond-type classes of assets and liabilities not measured at fair value measured based on Reuters market rates, and the fair value of other classes not measured at fair value of the Consolidated Statement of Financial Position is measured at discounted cash- flow method. Fair value of loans, net of loss allowance for loans measured at discount rate adjustment technique, the discount rate is derived from observed rates of return for comparable assets or liabilities that are traded in the market. Fair value measurements – in relation to instruments measured not at fair value – are mainly categorized in level 3 of the fair value hierarchy. Use of modified yield curve During the year ended 31 December 2022 yield curves derived from Hungarian government bonds (“ÁKK curve”) have become distorted due to certain market events, which means that real liquidity has concentrated on certain part of the yield curve. Therefore, a modified yield curve - which is not observable on the market - has been used at the concerning fair value calculations. This yield curve is based on the relevant yield curve points of the original ÁKK curve. Based on Management’s discretion fair value calculated with modified yield curves can represent the perspective of market participants reliable at current market conditions. Modified yield curve was used for calculating fair value in case of subsidized personal loans represented in “Loans mandatorily measured at fair value through profit or loss” line. INTEGRATED ANNUAL REPORT 2022 508 OTP BANK IFRS REPORT (CONSOLIDATED) NOTE 48: FAIR VALUE OF FINANCIAL INSTRUMENTS (in HUF mn) [continued] 48.1. Fair value of financial assets and liabilities Carrying amount Fair value Carrying amount Fair value 2022 2021 Cash, amounts due from banks and balances with the National Banks Placements with other banks Repo receivables Securities at amortized cost Loans at amortized cost Finance lease receivables Other financial assets Total assets not measured at fair value Financial assets at fair value through profit or loss Trading securities at fair value through profit or loss Fair value of derivative financial assets held for trading Non-trading instruments mandatorily at fair value through profit or loss Financial assets designated at fair value through profit or loss Equity instruments at fair value through other comprehensive income Securities at fair value through other comprehensive income Loans mandatorily at fair value through profit or loss Derivative financial assets designated as hedge accounting Total assets measured at fair value Financial assets total Amounts due to the National Governments, to the National Banks and other banks Repo liabilities Deposits from customers Liabilities from issued securities Leasing liabilities Other financial liabilities Subordinated bonds and loans Total liabilities not measured at fair value Financial liabilities designated at fair value through profit or loss Held for trading derivative financial liabilities Derivative financial liabilities designated as hedge accounting Total liabilities measured at fair value Financial liabilities total 4,221,392 1,351,082 41,009 4,891,938 16,094,458 1,298,752 262,981 28,161,612 436,387 104,750 276,482 55,155 - 40,157 1,699,446 1,247,414 48,247 3,471,651 31,633,263 1,463,158 217,369 25,188,805 870,682 63,778 645,652 301,984 28,751,428 54,191 385,747 27,949 467,887 29,219,315 4,221,392 1,322,560 42,993 4,048,877 15,557,928 1,320,286 262,981 26,777,017 436,387 104,750 276,482 55,155 - 40,157 1,699,446 1,247,414 48,247 3,471,651 30,248,668 1,109,924 227,669 25,056,412 743,907 63,791 645,652 268,911 28,116,265 54,191 385,747 27,949 467,887 28,584,152 2,556,035 1,584,861 61,052 3,891,335 13,493,183 1,182,628 135,916 22,905,010 341,397 103,510 184,484 53,403 - 34,976 2,189,534 1,068,111 18,757 3,652,775 26,557,785 1,567,348 79,047 21,068,644 436,325 53,286 485,771 278,334 23,968,755 41,184 202,716 11,228 255,128 24,223,883 2,556,035 1,566,458 61,121 3,645,046 13,106,425 1,183,089 135,916 22,254,090 341,397 103,510 184,484 53,403 - 34,976 2,189,534 1,068,111 18,757 3,652,775 25,906,865 1,446,036 79,010 21,002,125 400,071 53,447 485,771 284,709 23,751,169 41,184 202,716 11,228 255,128 24,006,297 INTEGRATED ANNUAL REPORT 2022 509 OTP BANK IFRS REPORT (CONSOLIDATED) NOTE 48: FAIR VALUE OF FINANCIAL INSTRUMENTS (in HUF mn) [continued] 48.2. Fair value of derivative instruments The Group regularly enters into hedging transactions in order to decrease its financial risks. However some economically hedging transaction do not meet the criteria to qualify as hedge accounting, therefore these transactions were accounted for as derivatives held for trading. The assessment of the hedge effectiveness (both for fair value hedges and cash flow hedges) to determine the economic relationship between the hedged item and the hedging instrument is accomplished with prospective scenario analysis via different rate shift scenarios of the relevant risk factor(s) of the hedged risk component(s). The fair value change of the hedged item and the hedging instrument is compared in the different scenarios. Economic relationship is justified if the change of the fair value of the hedged item and the hedging instrument are in the opposite direction and the absolute changes are similar amounts. The hedge ratio is determined as the ratio of the notional of the hedged item and the notional of the hedging instrument. The sources of hedge ineffectiveness are the not hedged risk components (e.g. change of cross currency basis spreads in case of interest rate risk hedges), slight differences in maturity dates and interest payment dates in case of fair value hedges, and differences between the carrying amount of the hedged item and the carrying amount of the hedging instrument in case of FX hedges (e.g. caused by interest rate risk components in the fair value of the hedging instrument). The summary of the derivatives held for trading and derivatives designated as hedge accounting of the Group are as follows: INTEGRATED ANNUAL REPORT 2022 510 OTP BANK IFRS REPORT (CONSOLIDATED) NOTE 48: FAIR VALUE OF FINANCIAL INSTRUMENTS (in HUF mn) [continued] 48.2. Fair value of derivative instruments [continued] Before netting Assets Liabilities 2022 Netting After netting Before netting Assets Liabilities Assets Liabilities 2021 Netting After netting Assets Liabilities Held for trading derivative financial instruments Interest rate derivatives Interest rate swaps Cross currency interest rate swaps OTC options Forward rate agreement Total interest rate derivatives (OTC derivatives) Foreign exchange derivatives Foreign exchange swaps Foreign exchange forward contracts OTC options Foreign exchange spot conversion Total foreign exchange derivatives (OTC derivatives) Equity stock and index derivatives Commodity Swaps Equity swaps OTC derivatives total Exchange traded futures and options Total equity stock and index derivatives Derivatives held for risk management not designated in hedge Interest rate swaps Foreign exchange swaps Foreign exchange spot Cross currency interest rate swaps Total derivatives held for risk 165,478 11,332 1,074 505 178,389 76,881 13,085 1,048 177 (171,706) (12,139) (1,069) (3) (184,917) (72,959) (13,740) (822) (177) 91,191 (87,698) 33,693 54 33,747 214 33,961 (31,632) (702) (32,334) (1,887) (34,221) 155,468 - - 505 155,973 - - - - - - - - - - 10,010 11,332 1,074 - 22,416 76,881 13,085 1,048 177 (16,238) (12,139) (1,069) 502 (28,944) (72,959) (13,740) (822) (177) 58,512 7,316 484 - 66,312 37,638 10,790 801 187 (56,070) (7,621) (299) - (63,990) (42,272) (7,738) (180) (242) 91,191 (87,698) 49,416 (50,432) 33,693 54 33,747 214 33,961 (31,632) (702) (32,334) (1,887) (34,221) 51,523 10,538 62,061 171 62,232 47,457 1,090 - 4,442 (51,508) (357) (51,865) (278) (52,143) (78,340) (4,108) - (168) 40,783 - - - 40,783 - - - - - - - - - - 5,682 - - - 17,729 7,316 484 - 25,529 37,638 10,790 801 187 (15,287) (7,621) (299) - (23,207) (42,272) (7,738) (180) (242) 49,416 (50,432) 51,523 10,538 62,061 171 62,232 41,775 1,090 - 4,442 (51,508) (357) (51,865) (278) (52,143) (72,658) (4,108) - (168) 136,164 2,514 - 9,180 (239,975) (10,190) (43) (3,620) 18,944 - - - 117,220 2,514 - 9,180 (221,031) (10,190) (43) (3,620) management not designated in hedge 147,858 (253,828) 18,944 128,914 (234,884) 52,989 (82,616) 5,682 47,307 (76,934) Total held for trading derivative financial instruments 451,399 (560,664) 174,917 276,482 (385,747) 230,949 (249,181) 46,465 184,484 (202,716) INTEGRATED ANNUAL REPORT 2022 511 OTP BANK IFRS REPORT (CONSOLIDATED) NOTE 48: FAIR VALUE OF FINANCIAL INSTRUMENTS (in HUF mn) [continued] 48.2. Fair value of derivative instruments [continued] Derivative financial instruments designated as hedge accounting Derivatives designated in cash flow hedges Interest rate swaps Total derivatives designated in cash flow hedges Derivatives designated in fair value hedges Interest rate swaps Cross currency interest rate swaps Foreign exchange swaps Total derivatives designated in fair value hedges Total derivatives held for risk management Before netting Assets Liabilities 2022 Netting After netting Before netting Assets Liabilities Assets Liabilities 2021 Netting After netting Assets Liabilities 2,651 2,651 56,757 20,732 1,696 79,185 (2,651) (2,651) (37,290) (5,398) (16,199) (58,887) 2,651 2,651 30,938 - - 30,938 - - 25,819 20,732 1,696 48,247 - - (6,352) (5,398) (16,199) (27,949) 1,020 1,020 25,417 5,471 - 30,888 (1,020) (1,020) (17,908) (5,451) - (23,359) 1,020 1,020 12,131 - - 12,131 - - 13,286 5,471 - 18,757 - - (5,777) (5,451) - (11,228) (OTC derivatives) 81,836 (61,538) 33,589 48,247 (27,949) 31,908 (24,379) 13,151 18,757 (11,228) INTEGRATED ANNUAL REPORT 2022 512 OTP BANK IFRS REPORT (CONSOLIDATED) NOTE 48: FAIR VALUE OF FINANCIAL INSTRUMENTS (in HUF mn) [continued] 48.3. Types of hedge accounting Interest rate risk management is centralized at the Group. Interest rate risk exposures in major currencies are managed at OTP Headquarter on a consolidated level. Although risk exposures in local currencies are managed at subsidiary level, the respective decisions are subject to Headquarter ALCO approval. Interest rate risk is measured by simulating NII and EVE under different stress and plan scenarios, the established risk limits are described in „OTP Bank’s Group-Level Regulations on the Management of Liquidity Risk and Interest Rate Risk of Banking Book”. The interest rate risk management activity aims to stabilize NII within the approved risk limits The risk management objective of these hedge relationships is to mitigate the risk of clean fair value (i.e. excluding accrued interest) change of MIRS loans due to the change of interest rate reference indices (BUBOR, EURIBOR, LIBOR, etc.) of the respective currency. The ineffective part of fair value hedge accounting is presented on Interest income / Interest expense in the Consolidated Statement of Profit or Loss. INTEGRATED ANNUAL REPORT 2022 513 OTP BANK IFRS REPORT (CONSOLIDATED) NOTE 48: FAIR VALUE OF FINANCIAL INSTRUMENTS (in HUF mn) [continued] 48.3. Types of hedge accounting [continued] Amount, timing and uncertainty of future cash flows – hedging instruments as at 31 December 2022 (in fx million) Type of hedge Type of risk Type of instrument Fair Value Hedge Interest rate risk Interest rate swap Within one month Within three months and over one month Within one year and over three months Within five years and over one year More than five years Total HUF Notional Average Interest Rate (%) EUR Notional Average Interest Rate (%) USD Notional Average Interest Rate (%) JPY Notional Average Interest Rate (%) Cross currency interest rate swap EUR/HUF Notional Average Interest Rate (%) Average FX Rate Fair Value Hedge Foreign exchange & Interest rate risk - - - - - - - - - - - - 90 2.60% - - - - (64,875) 7.15% 101 0.24% - - - - 10 0.22% 29 2.35% 4,500 0.22% 30,300 1.40% 50 0.05% 47 4.18% - - (34,575) 161 166 4,500 - (1.64%) 310.41 1 (1.68%) 310.17 2 (1.68%) 310.20 10 (1.71%) 309.74 11 (1.82%) 307.71 24 INTEGRATED ANNUAL REPORT 2022 514 OTP BANK IFRS REPORT (CONSOLIDATED) NOTE 48: FAIR VALUE OF FINANCIAL INSTRUMENTS (in HUF mn) [continued] 48.3. Types of hedge accounting [continued] Amount, timing and uncertainty of future cash flows – hedging instruments as at 31 December 2022 (in fx million) [continued] Type of hedge Type of risk Type of instrument Within one month Within three months and over one month Within one year and over three months Within five years and over one year More than five years Total Fair Value Hedge Foreign exchange risk Cross currency interest rate swap EUR/HUF Notional Average FX Rate RON/HUF Notional Average FX Rate JPY/HUF Notional Average FX Rate USD/HUF Notional Average FX Rate - 363.88 (10) 407.57 - - - - - - - - - - (7) 323.77 125 362.11 400 72.92 - - 144 323.77 878 373.88 3,121 75.08 4,500 2.79 146 323.77 - - - - - - - - 993 3,521 4,500 283 INTEGRATED ANNUAL REPORT 2022 515 OTP BANK IFRS REPORT (CONSOLIDATED) NOTE 48: FAIR VALUE OF FINANCIAL INSTRUMENTS (in HUF mn) [continued] 48.3. Types of hedge accounting [continued] Amount, timing and uncertainty of future cash flows – hedging instruments as at 31 December 2021 (in fx million) Type of hedge Type of risk Type of instrument Fair Value Hedge Interest rate risk Interest rate swap Within one month Within three months and over one month Within one year and over three months Within five years and over one year More than five years Total HUF Notional Average Interest Rate (%) EUR Notional Average Interest Rate (%) USD Notional Average Interest Rate (%) JPY Notional Average Interest Rate (%) Cross currency interest rate swap EUR/HUF Notional Average Interest Rate (%) Average FX Rate Fair Value Hedge Foreign exchange & Interest rate risk - - - - - - - - 2,000 1.09% - - - - - - 900 0.49% 1 0.23% - - - - (52,474) 1.65% 111 0.24% 119 2.54% 4,500 0.22% 42,950 1.31% 50 0.05% 47 4.18% - - (6,624) 162 166 4,500 - (1.64)% 310.41 1 (1.68)% 310.29 2 (1.67)% 310.26 12 (1.69)% 310.01 12 (1.82)% 307.81 27 INTEGRATED ANNUAL REPORT 2022 516 OTP BANK IFRS REPORT (CONSOLIDATED) NOTE 48: FAIR VALUE OF FINANCIAL INSTRUMENTS (in HUF mn) [continued] 48.3. Types of hedge accounting [continued] Amount, timing and uncertainty of future cash flows – hedging instruments as at 31 December 2021 (in fx million) [continued] Type of hedge Type of risk Type of instrument Within one month Within three months and over one month Within one year and over three months Within five years and over one year More than five years Total Fair Value Hedge Foreign exchange risk Cross currency interest rate swap EUR/HUF Notional Average FX Rate RON/HUF Notional Average FX Rate RUB/HUF Notional Average FX Rate JPY/HUF Notional Average FX Rate USD/HUF Notional Average FX Rate Other Interest rate swap HUF Notional - 363.88 (6) 354.22 35 356.94 200 66.21 - - - - - - - - - - - 323.77 (3) 323.77 572 355.93 2,225 73.08 11,200 4.15 4,500 2.79 306 323.77 3,345 1,823 3,093 - - - - - - - - - - - - - - - - - - - - 601 2,425 11,200 4,500 303 8,261 INTEGRATED ANNUAL REPORT 2022 517 OTP BANK IFRS REPORT (CONSOLIDATED) NOTE 48: FAIR VALUE OF FINANCIAL INSTRUMENTS (in HUF mn) [continued] 48.3. Types of hedge accounting [continued] As at 31 December 2022 is as follows: Type of hedge Type of instrument Type of risk Nominal amount of the hedging instrument Carrying amount of the hedging instrument as at 31 December 2022 Line item in the consolidated statement of financial position where the hedging instrument is located Changes in fair value used for calculating hedge ineffectiveness for the six-month period ended as at 31 December 2022 Fair value hedge IRS Interest rate risk 444,627 56,636 (37,258) 30,938 25,698 (6,320) Derivative financial instruments 12,873 Before netting Netting After netting Assets Liabilities Assets Liabilities CCIRS FX & IR risk 7,292 - (2,679) CCIRS FX risk 813,430 20,732 (2,719) FX swap FX risk 290,982 1,696 (16,199) IRS Other 5,584 121 (32) - - - - designated as hedge accounting - (2,679) Derivative financial instruments 3 designated as hedge accounting 20,732 (2,719) Derivative financial instruments (6,087) designated as hedge accounting 1,696 (16,199) Derivative financial instruments designated as hedge accounting 121 (32) Derivative financial instruments designated as hedge accounting - 1 6,790 Fair value hedges total 1,561,915 79,185 (58,887) 30,938 48,247 (27,949) INTEGRATED ANNUAL REPORT 2022 518 OTP BANK IFRS REPORT (CONSOLIDATED) NOTE 48: FAIR VALUE OF FINANCIAL INSTRUMENTS (in HUF mn) [continued] 48.3. Types of hedge accounting [continued] As at 31 December 2021 is as follows: Type of hedge Type of instrument Type of risk Nominal amount of the hedging instrument Carrying amount of the hedging instrument as at 31 December 2021 Line item in the consolidated statement of financial position where the hedging instrument is located Changes in fair value used for calculating hedge ineffectiveness for the year ended as at 31 December 2021 Fair value hedge IRS Interest rate risk 409,595 23,986 (17,908) 12,131 11,855 (5,777) Derivative financial instruments 6,494 Before netting Netting After netting Assets Liabilities Assets Liabilities CCIRS FX & IR risk 8,175 - (2,375) CCIRS FX risk 566,936 5,471 (3,076) IRS Other 8,261 1,431 - - - - designated as hedge accounting - (2,375) Derivative financial instruments 4 5,471 (3,076) Derivative financial instruments (1,687) designated as hedge accounting designated as hedge accounting 1,431 - Derivative financial instruments designated as hedge accounting 3 4,814 Fair value hedges total 992,967 30,888 (23,359) 12,131 18,757 (11,228) INTEGRATED ANNUAL REPORT 2022 519 OTP BANK IFRS REPORT (CONSOLIDATED) NOTE 48: FAIR VALUE OF FINANCIAL INSTRUMENTS (in HUF mn) [continued] 48.3. Types of hedge accounting [continued] As at 31 December 2022 is as follows: Type of hedge Type of risk Carrying amount of the hedged item as at 31 December 2022 Fair value hedges Assets Liabilities - Loans - Loans Interest rate risk Interest rate risk 64,596 - - 143,208 - Government bonds - Government bonds Interest rate risk Interest rate risk - Government bonds Interest rate risk - Other bonds Interest rate risk - Other bonds - Loans - Loans - Government bonds - Government bonds - Other securities Fair value hedges total Interest rate risk Foreign exchange & Interest rate risk Foreign exchange risk Foreign exchange risk Foreign exchange risk Other risk 14,814 151,501 - 44,508 - - - - - 25,563 9,099 716,841 12,797 113,806 - 1,127,962 - - - - 2,299 171,070 Amount of fair value hedge adjustments on the hedged item included in the carrying amount of the hedged item for the year ended 31 December 2022 Liabilities Assets Line item in the consolidated statement of financial position in which the hedged item is included (5,033) - (4,601) (45,319) - (638) - 503 - - - - (55,088) - Loans (34,149) Amounts due to banks, the National Governments, deposits from the National Banks and other banks - Securities at amortized cost - Securities at fair value through other comprehensive income - Financial assets at fair value through profit or loss - Securities at fair value through other comprehensive income 448 Liabilities from issued securities - Loans - Loans - Securities at fair value through other comprehensive income - Securities at amortized cost (218) Liabilities from issued securities (33,919) INTEGRATED ANNUAL REPORT 2022 520 OTP BANK IFRS REPORT (CONSOLIDATED) NOTE 48: FAIR VALUE OF FINANCIAL INSTRUMENTS (in HUF mn) [continued] 48.3. Types of hedge accounting [continued] As at 31 December 2021 is as follows: Type of hedge Type of risk Carrying amount of the hedged item as at 31 December 2021 Fair value hedges Assets Liabilities - Loans - Loans - Government bonds - Government bonds Interest rate risk Interest rate risk Interest rate risk Interest rate risk - Other bonds Interest rate risk - Loans - Loans - Government bonds - Government bonds - Other securities Fair value hedges total Foreign exchange & Interest rate risk Foreign exchange risk Foreign exchange risk Foreign exchange risk Other risk 57,176 - 13,921 152,830 42,008 101,934 458,312 12,811 98,668 - 937,660 - 142,649 - - - - - - - 8,261 150,910 Amount of fair value hedge adjustments on the hedged item included in the carrying amount of the hedged item for the year ended 31 December 2021 Liabilities Assets Line item in the consolidated statement of financial position in which the hedged item is included 637 - 1,230 22,457 318 611 - - - - 25,253 - Loans (16,858) Amounts due to banks, the National Governments, deposits from the National Banks and other banks - Securities at amortized cost - Securities at fair value through other comprehensive income - Securities at fair value through other comprehensive income (1,114) Loans - Loans - Securities at fair value through other comprehensive income - Securities at amortized cost (161) Liabilities from issued securities (18,133) INTEGRATED ANNUAL REPORT 2022 521 OTP BANK IFRS REPORT (CONSOLIDATED) NOTE 48: FAIR VALUE OF FINANCIAL INSTRUMENTS (in HUF mn) [continued] 48.3. Types of hedge accounting [continued] Change in basis swap spread recognised in the consolidated other comprehensive income related fair value hedges as follows: Type of risk Carrying amount of the hedged item Items recognized in the consolidated other comprehensive income for the year ended 31 December 2022 Change in the items recognized in other comprehensive income for the year ended 31 December 2022 Line item in the consolidated statement of financial position in which the hedged item is included FX risk FX risk Total Assets Liabilities 716,841 12,797 729,638 - - - Type of risk Carrying amount of the hedged item (363) (52) (415) 605 Loans at amortised cost - Securities at fair value through other comprehensive income 605 Items recognised in the consolidated other comprehensive income for the year 2021 Change in the items recognized in other comprehensive income for the year 2021 Line item in the consolidated statement of financial position in which the hedged item is included FX risk FX risk Total Assets Liabilities 458,312 12,811 471,123 - - - (1,032) 64 (968) (1,681) Loans at amortised cost - Securities at fair value through other comprehensive income (1,681) On Group level there weren’t any cash-flow hedges for the year ended as at 31 December 2022 and 2021. Neither at the end of 31 December 2022 nor at the end of 31 December 2021 regarding net investment hedges for foreign subsidiaries there aren’t any disclosure requirements to be presented. INTEGRATED ANNUAL REPORT 2022 522 OTP BANK IFRS REPORT (CONSOLIDATED) NOTE 48: FAIR VALUE OF FINANCIAL INSTRUMENTS (in HUF mn) [continued] 48.4. Fair value levels Methods and significant assumptions used to determine fair value of the different levels of financial instruments: - Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities; - Level 2: inputs other than quoted prices included within Level 1, that are observable for the asset or liability either directly or indirectly. Fair value measurements – in relation with instruments measured not at fair value – are categorized in level 2; - Level 3: inputs for the asset or liability that are not based on observable market data (unobservable inputs). The following table shows an analysis of financial instruments recorded at fair value by level of the fair value hierarchy: 2022 Total Level 1 Level 2 Level 3 Financial assets at fair value through profit or loss Trading securities at fair value through profit or loss Positive fair value of derivative financial assets held for trading Non-trading instruments mandatorily at fair value through profit or loss 1 Securities at fair value through other comprehensive income 2 Loans mandatorily measured at fair value through profit or loss Positive fair value of derivative financial assets designated as fair value hedge Financial assets measured at fair value total Financial liabilities designated at fair value through profit or loss Negative fair value of held-for-trading derivative financial liabilities Negative fair value of derivative financial liabilities designated as fair value hedge Financial liabilities measured at fair value total 436,387 104,750 276,482 55,155 1,739,603 1,247,414 48,247 3,471,651 54,191 385,747 27,949 467,887 85,339 50,131 214 34,994 562,081 - - 647,420 - 1,886 - 1,886 339,060 54,619 276,268 8,173 1,103,082 - 48,247 1,490,389 - 383,211 27,949 411,160 11,988 - - 11,988 74,440 1,247,414 - 1,333,842 54,191 650 - 54,841 The portfolio in level 3 includes Visa C shares. 2 The portfolio in level 3 includes HUF 26,571 million Ukrainian and HUF 27,415 million Russian government bonds. The fair value of investment properties is presented in Note 14 and they are categorized in level 3. INTEGRATED ANNUAL REPORT 2022 523 OTP BANK IFRS REPORT (CONSOLIDATED) NOTE 48: FAIR VALUE OF FINANCIAL INSTRUMENTS (in HUF mn) [continued] 48.4. Fair value levels [continued] 2021 Total Level 1 Level 2 Level 3 Financial assets at fair value through profit or loss Trading securities at fair value through profit or loss Positive fair value of derivative financial assets held for trading Non-trading instruments mandatorily at fair value through profit or loss 1 Securities at fair value through other comprehensive income 2 Loans mandatorily measured at fair value through profit or loss Positive fair value of derivative financial assets designated as fair value hedge Financial assets measured at fair value total Financial liabilities designated at fair value through profit or loss Negative fair value of held-for-trading derivative financial liabilities Negative fair value of derivative financial liabilities designated as fair value hedge Financial liabilities measured at fair value total The portfolio in level 3 includes mainly Visa C shares. 2 The portfolio in level 3 includes HUF 55,476 million Ukrainian government bonds. 341,397 103,510 184,484 53,403 2,224,510 1,068,111 18,757 3,652,775 41,184 202,716 11,228 255,128 90,877 58,727 171 31,979 910,324 281 - 1,001,482 - 278 - 278 227,153 44,777 174,143 8,233 1,250,833 - 18,757 1,496,743 - 202,438 11,228 213,666 23,367 6 10,170 13,191 63,353 1,067,830 - 1,154,550 41,184 - - 41,184 The fair value of investment properties is presented in Note 14 and they are categorized in level 3. INTEGRATED ANNUAL REPORT 2022 524 OTP BANK IFRS REPORT (CONSOLIDATED) NOTE 48: FAIR VALUE OF FINANCIAL INSTRUMENTS (in HUF mn) [continued] 48.4. Fair value levels [continued] Movements in Level 3 financial instruments measured at fair value The following table shows a reconciliation of the opening and closing amount of Level 3 financial assets and liabilities which are recorded at fair value: 2022 Trading securities at fair value through profit or loss Positive fair value of derivative financial assets held for trading Non-trading securities mandatorily at fair value through profit or loss Securities at fair value through other comprehensive income Loans mandatorily measured at fair value through profit or loss 1 Financial assets measured at fair value total Financial liabilities designated at fair value through profit or loss Negative fair value of held-for-trading derivative financial liabilities Financial liabilities designated at fair value total Opening balance Purchase (+) Issuance /Disbursement (+) Settlement / Close (-) Sale (-) FVA (+/-) Transfer (+/-) Fx effect / Revaluation Other Closing balance 6 10,170 13,191 63,353 1,067,830 1,154,550 41,184 - 41,184 - - - 981 - 981 - - - - - 1,171 - - - - - - - - (33,288) 258,658 (81,764) (1,490) 259,829 (81,764) (34,778) - - - (1,624) - (1,624) - - - - (10,170) (1,745) 15,310 3,885 7,280 (1,934) 650 (1,284) - - - - - (6) - - - 482 (1,111) 11,988 19,678 (1,051) 9,457 74,440 - 19,678 (11) (580) 306 1,247,414 8,646 1,333,842 - - - - - - 16,565 54,191 - 650 16,565 54,841 1 HUF 13,346 million fair value adjustment resulting from risk factors and HUF (9,991) million adjustment resulting from market factors.are included into FVA change for the current year at loans mandatorily measured at fair value through profit or loss. INTEGRATED ANNUAL REPORT 2022 525 OTP BANK IFRS REPORT (CONSOLIDATED) NOTE 48: FAIR VALUE OF FINANCIAL INSTRUMENTS (in HUF mn) [continued] 48.4. Fair value levels [continued] Movements in Level 3 financial instruments measured at fair value [continued] The following table shows a reconciliation of the opening and closing amount of Level 3 financial assets and liabilities which are recorded at fair value: 2021 Trading securities at fair value through profit or loss Positive fair value of derivative financial assets held for trading Non-trading securities mandatorily at fair value through profit or loss Securities at fair value through other comprehensive income Loans mandatorily measured at fair value through profit or loss 1 Financial assets measured at fair value total Financial liabilities designated at fair value through profit or loss Financial liabilities designated fair value total Opening balance Purchase (+) Issuance /Disbursement (+) Settlement / Close (-) Sale (-) FVA (+/-) Transfer (+/-) Fx effect / Revaluation Other Closing balance 12 6,586 15,433 - - - 56,906 81,795 - - 390 - - - - - - (4,501) (5,544) (2,018) - 3,584 640 (91) 798,981 - 333,931 (41,038) - (24,044) - - (57) (69,636) - - - 256 1,813 - (6) - 6 10,170 1,030 13,191 128 63,353 - 1,067,830 877,918 81,795 334,321 (46,582) (6,519) (19,911) (69,693) 2,069 1,152 1,154,550 31,896 31,896 - - - - (9,685) (9,685) - - 3,916 3,916 - - - - 15,057 41,184 15,057 41,184 1 FVA change for the previous period at loans mandatorily measured at fair value through profit or loss consists of HUF 16,289 million adjustment resulting from risk factors and HUF 7,755 million adjustment resulting from market factors. INTEGRATED ANNUAL REPORT 2022 526 OTP BANK IFRS REPORT (CONSOLIDATED) NOTE 48: FAIR VALUE OF FINANCIAL INSTRUMENTS (in HUF mn) [continued] 48.4. Fair value levels [continued] Valuation techniques on Level 2 instruments The fair value of Level 2 instruments is calculated by discounting their expected interest and capital cash flows. Discounting is done with the respective swap curve of each currency. Valuation techniques and sensitivity analysis on Level 3 instruments Sensitivity analysis is performed on products with significant unobservable inputs (Level 3) to generate a range of reasonably possible alternative valuations. The sensitivity methodologies applied take account of the nature of the valuation techniques used, as well as the availability and reliability of observable proxy and historical date and the impact of using alternative models. The calculation is based on a range or spread data of reliable reference source or a scenario based on relevant market analysis alongside the impact of using alternative models. Sensitivities are calculated without reflecting the impact of any diversification in the portfolio. Unobservable inputs used in measuring fair value Type of financial instrument Valuation technique Significant unobservable input VISA C shares MFB refinancing loans Subsidized personal loans Subsidized personal loans Subsidized personal loans Market approach combined with expert judgement. Discounted cash flow model Discounted cash flow model Discounted cash flow model Discounted cash flow model Ministry of Finance of Russia Ministry of Finance of Ukraine Discounted cash flow model Discounted cash flow model Illiquidity Probability of default Probability of default Operational costs Demography Credit risk Credit risk Range of estimates for unobservable input +12% / (12%) +/ (20)% +/ (20)% +/ (20)% Change in the cash flow estimation +/(5)% +/ (15)% +/ (1)% INTEGRATED ANNUAL REPORT 2022 527 OTP BANK IFRS REPORT (CONSOLIDATED) NOTE 48: FAIR VALUE OF FINANCIAL INSTRUMENTS (in HUF mn) [continued] 48.4. Fair value levels [continued] The effect of unobservable inputs on fair value measurement Although the Group believes that its estimates of fair value are appropriate, the use of different methodologies or assumptions could lead to different measurements of fair value. For fair value measurements in Level 3 changing the assumptions used to reasonably possible alternative assumptions would have the following effects. 2022 Presentation in the Statement of Financial Position Unobservable inputs Book value Fair values Effect on profit and loss Favourable Unfavourable Favourable Unfavourable VISA C shares MFB refinancing loans Subsidised personal loans Subsidised personal loans Subsidised personal loans Russian government bonds Ukrainian government bonds Loans mandatorily at fair value through profit or loss Loans mandatorily at fair value through profit or loss Total Non-trading instruments mandatorily at fair value through profit or loss Financial liabilities designated at fair value through profit or loss Loans mandatorily at fair value through profit or loss Loans mandatorily at fair value through profit or loss Loans mandatorily at fair value through profit or loss Trading securities at fair value through other comprehensive income Trading securities at fair value through other comprehensive income Loans mandatorily at fair value through profit or loss Illiquidity 2,951 3,430 Probability of default 15,483 15,602 Probability of default Operational costs Demography Credit risk 772,094 772,094 772,094 37,580 773,281 777,898 774,528 50,468 2,472 15,364 770,911 769,012 769,544 24,692 Credit risk 26,571 26,571 26,571 Probability of default 454,164 454,383 453,945 479 119 1,187 5,804 2,434 12,888 - 219 (479) (119) (1,183) (3,082) (2,550) (12,888) - (219) Loans mandatorily at fair value through profit or loss Operational costs 454,164 459,950 448,558 5,786 (5,606) 3,307,195 3,336,111 3,281,069 28,916 (26,126) 2021 Presentation in the Statement of Financial Position Unobservable Book value Fair values Effect on profit and loss Favourable Unfavourable Favourable Unfavourable VISA C shares MFB refinancing loans Subsidised personal loans Subsidised personal loans Subsidised personal loans Ukrainian government bonds Loans mandatorily at fair value through profit or loss Loans mandatorily at fair value through profit or loss Total Non-trading instruments mandatorily at fair value through profit or loss Financial liabilities designated at fair value through profit or loss Loans mandatorily at fair value through profit or loss Loans mandatorily at fair value through profit or loss Loans mandatorily at fair value through profit or loss Trading securities at fair value through other comprehensive income Loans mandatorily at fair value through profit or loss Illiquidity 5,891 6,704 Probability of default 19,095 19,218 Probability of default Operational costs Demography Credit risk 635,416 635,416 635,416 55,475 639,006 647,291 635,484 55,475 5,078 18,972 631,855 623,933 635,387 55,475 813 123 3,590 11,875 68 - (813) (123) (3,561) (11,483) (29) - Probability of default 405,819 406,368 405,272 549 (547) Loans mandatorily at fair value through profit or loss Operational costs 405,819 412,873 399,025 7,054 (6,794) 2,798,347 2,822,419 2,774,997 24,072 (23,350) INTEGRATED ANNUAL REPORT 2022 528 OTP BANK IFRS REPORT (CONSOLIDATED) NOTE 48: FAIR VALUE OF FINANCIAL INSTRUMENTS (in HUF mn) [continued] 48.4. Fair value levels [continued] The effect of unobservable inputs on fair value measurement [continued] The favourable and unfavourable effects of using reasonably possible alternative assumptions for the valuation of Visa C shares have been calculated by modifying the discount rate used for the valuation by +/-12% as being the best estimates of the management as at 31 December 2022 and 31 December 2021 respectively. In the case of Hungarian Development Bank (“MFB”) refinancing loans and subsidised personal loans the Bank calculated the favourable and unfavourable effects of using reasonably possible alternative assumptions by modifying the rates of probability of default by +/- 20% as one of the most significant unobservable inputs. In case of subsidised personal loans operational cost and factors related to demography are considered as unobservable inputs to the applied fair value calculation model in addition to credit risk. The Bank calculated the favourable and unfavourable effects of using reasonably possible alternative assumptions by modifying the rates of operational costs by +/- 20% as one of the most significant unobservable inputs. In case of subsidised personal loans cash flow estimation are based on assumption related to the future number of childbirths performed by the debtors both in the current and the comparative period. According to the assumptions used in comparative period 15% of the debtors will not fulfill the conditions of the subsidy determined by the government after 5 years (“breach of conditions”), thereby debtors will be obliged to pay back the interest subsidy given in advance. Furthermore, in this case subsidised loans are converted to loans provided based on market conditions. Loans are prepaid by the government as part of the subsidy after the second and the third childbirth following the signatory of the loan contract. The Bank calculated the favourable and unfavourable effects of using reasonably possible alternative assumptions by modifying the demographical assumption of breach of conditions by +/- 5% as the most significant unobservable input in the cash flow estimation. For the year ended 31 December 2022 the Bank used a new and more detailed model for cash flow calculations of the subsidised personal loans. The new model uses more scenarios compared to the previous one. These scenarios based on the above-mentioned events (child births after signatory and breach of conditions) and also the event of divorce. The model uses public statistical information for these events to estimate. The Bank calculated the favourable and unfavourable effects of using reasonably possible alternative assumptions by modifying the demographical assumption of future child births by +/-5% as one of the most significant unobservable inputs in the cash flow estimation. The favourable and unfavourable effects of using reasonably possible alternative assumptions for the valuation of FVOCI securities have been calculated by modifying the discount rate used for the valuation by +/-15% and +/- 1% as being the best estimates of the management as at 31 December 2022 and 2021 respectively. INTEGRATED ANNUAL REPORT 2022 529 OTP BANK IFRS REPORT (CONSOLIDATED) NOTE 49: SEGMENT REPORTING BY BUSINESS AND GEOGRAPHICAL SEGMENTS (in HUF mn) The Group distinguishes business and geographical segments. The report on the base of the business and geographical segments is reported below. The reportable segments of the Group on the base of IFRS 8 are as the follows: OTP Core Hungary, Russia, Ukraine, Bulgaria, Romania, Serbia, Croatia, Montenegro, Albania, Moldova, Slovenia, Merkantil Group, Asset Management subsidiaries, Other subsidiaries and Corporate Center. OTP Core is an economic unit for measuring the result of core business activity of the Group in Hungary. Financials for OTP Core are calculated from the partially Consolidated Financial Statements of the companies engaged in the Group’s underlying banking operation in Hungary. These companies include OTP Bank Hungary Plc, OTP Mortgage Bank Ltd., OTP Building Society Ltd., OTP Factoring Ltd., OTP Financial Point Ltd., and companies providing intragroup financing. The Bank Employee Stock Ownership Plan Organization was included from the fourth quarter of 2016; OTP Card Factory Ltd., OTP Facility Management Llc., Monicomp Ltd. and OTP Real Estate Lease Ltd. were included from the first quarter of 2017 (from the first quarter of 2019 OTP Real Estate Lease Ltd. was eliminated from OTP Core); OTP Mobile Service Llc., OTP Ingatlanpont Llc. were included from the first quarter of 2019, OTP Ecosystem Ltd. (previous name: OTP eBIZ Ltd.) from the first quarter of 2020 and OTP Home Solutions Ltd. was included from the second quarter of 2021. The consolidated accounting results of these companies are segmented into OTP Core and Corporate Centre. The latter is a virtual entity. Within the Group, the Corporate Centre acts as a virtual entity established by the equity investment of OTP Core for managing the wholesale financing activity for all the subsidiaries within the Group but outside OTP Core. Therefore, the balance sheet of the Corporate Centre is funded by the equity and intragroup lending received from OTP Core, the intragroup lending received from other subsidiaries, and the subordinated debt and senior notes arranged by OTP under its running EMTN program. From this funding pool, the Corporate Centre is to provide intragroup lending to, and hold equity stakes in OTP subsidiaries outside OTP Core. Main subsidiaries financed by Corporate Centre are as follows: Hungarians: Merkantil Bank Ltd, OTP Real Estate Lease Ltd, OTP Fund Management Ltd, OTP Real Estate Investment Fund Management Ltd, OTP Life Annuity Ltd; foreigners: banks, leasing companies, factoring companies. The results of foreign factoring companies (OTP Factoring Ukraine LLC, OTP Factoring SRL, OTP Factoring Bulgaria LLC, OTP Factoring Serbia d.o.o., and OTP Debt Collection d.o.o. (formerly known as: OTP Factoring Montenegro d.o.o.), as well as the foreign leasing companies are included into the relevant foreign bank’s segment. The Other subsidiaries include, among others: OTP Real Estate Ltd., OTP Life Annuity Ltd, OTP Funds Servicing and Consulting Ltd. The reportable business and geographical segments of the Group are those components where: - - - - separated income and expenses, assets and liabilities can be identified and assignable to the segments, transactions between the different segments were eliminated, the main decisive board of the Group regularly controls the operating results, separated financial information is available. INTEGRATED ANNUAL REPORT 2022 530 OTP BANK IFRS REPORT (CONSOLIDATED) NOTE 49: SEGMENT REPORTING BY BUSINESS AND GEOGRAPHICAL SEGMENTS (in HUF mn) [continued] Adjustments Goodwill / investment impairment and their tax shield effect: According to the accounting standards the effect of the goodwill impairment of JSC “OTP Bank” (Russia) was HUF 67,714 million in the first quarter of 2022, which equals to the original RUB 9,395 million amount and the historic FX rate at the time of entry. However, due to the change in RUB exchange rate against HUF until the booking of the goodwill impairment, there was a revaluation gain of HUF 26,848 million booked directly against equity. Thus, the goodwill impairment’s net impact on the shareholders’ equity was HUF (40,866) million (before tax). Furthermore, in the first quarter of 2022 investment impairment was booked in relation to the Russian, Ukrainian and Moldovan subsidiary banks. The impairments themselves are eliminated on consolidated level, therefore they do not have an effect for the consolidated profit or loss, but their positive tax shield is still recognized in the consolidated profit or loss (+HUF 11,400 million effect). In the third quarter of 2022 HUF 1.8 billion corporate tax effect emerged in the wake of the impairment booked in relation to the revaluation of the subsidiary investment in OTP Mortgage Bank. In the fourth quarter of 2022 HUF (4.8) billion corporate tax effect emerged due to the reversal of impairment booked mainly in relation to the revaluation of the investment in the Russian and Serbian subsidiaries. As at 31 December 2021 HUF 39,546 million impairment was booked on the investment in OTP Bank Romania S.A. on which HUF 3,559 million positive tax effect was recognized, HUF 9,906 million impairment release was booked on OTP Banka Srbija a.d. on which HUF 892 million negative tax effect was recognized, 16,628 million impairment release was booked on Crnogorska komercjalna banka a.d. on which HUF 1,496 million negative tax effect was recognized, 8,463 million impairment was booked on Monicomp Ltd. on which HUF 763 million positive tax effect was recognized. Special taxes on financial institutions (after income tax): The after-tax effect of the special tax on financial institutions payable in Hungary since 2010 reached HUF 20.2 billion for full-year 2022, the whole amount was booked in the first quarter. Furthermore, for 2022 the after-tax burden of the windfall tax (announced by the Hungarian Government on 4 June and payable temporarily in 2022 and 2023) was HUF 67.9 billion, accounted for in a lump sum in the second quarter. Thirdly, the newly introduced special tax on certain companies in Croatia was booked in the fourth quarter of 2022 with an after-tax effect of HUF (3.2) billion. Effect of acquisitions (after income tax): The following main items appeared on this line in the period under review: the integration costs of the acquired banks and other direct effects related to the acquisitions (such as customer base value amortisation). Moratorium one-off effect: During the term of the moratorium OTP Bank accrues the unpaid interest in its statement of recognized income, amongst the revenues. At the same time, due to the fact that interest cannot be charged on the unpaid interest, and the unpaid interest will be repaid later, in the course of 2020, 2021 and 2022 altogether HUF 44.1 billion one-off after tax loss emerged in Hungary. INTEGRATED ANNUAL REPORT 2022 531 OTP BANK IFRS REPORT (CONSOLIDATED) NOTE 49: SEGMENT REPORTING BY BUSINESS AND GEOGRAPHICAL SEGMENTS (in HUF mn) [continued] Adjustments [continued] Impairments on Russian government bonds at OTP Core and DSK Bank: As at 31 December 2022 the face value of Russian government bonds held by OTP Bank and DSK Bank comprised HUF 135.7 billion. During the first quarter those exposures were shifted into the Stage 3 category, and altogether HUF 38.3 billion impairments were recognized in the course of 2022 (mainly in the first quarter) in relation to those exposures, resulting in an after-tax negative effect of HUF 34.8 billion. Also, the fair value of those exposures that are measured at fair value was reduced through a negative fair value adjustment recognized within the comprehensive income statement. As a combined effect of the above two factors, the net book value of these Russian bonds held by OTP Bank in Hungary and DSK Bank in Bulgaria stood at HUF 62 billion. Effect of the liquidation of Sberbank Hungary: The liquidation of Sberbank Hungary resulted in an after-tax effect of HUF (10.4) billion. In the second quarter the Hungarian Group members were obliged to pay HUF 28.5 billion extraordinary contribution to the National Deposit Insurance Fund. At the same time this amount was offset by the expected recovery from the already completed sale of Sberbank’s assets. Interest rate cap Hungary: For the period between 1 January and 30 June 2022 the Hungarian Government introduced an interest rate cap for variable-rate retail mortgage loans, and for housing purposes financial leasing contracts, too. Pursuant to Government Decree, the Government extended the interest rate cap by an additional 6 months, that is until 31 December 2022. The expected one-off effect of the extension of the interest rate cap amounted to HUF (10.1) billion (after tax) and was booked in the second quarter of 2022. On 22 October 2022 the Government announced that starting from 15 November until 30 June 2023, the reference rate of certain MSE loans will also be capped and the provisions shall be applied to HUF denominated, non-subsidized, floating rate loans to micro and small enterprises and financial lease contracts, excluding overdraft loan agreements. The expected negative after tax effect of the measures taken in October 2022 amounted to HUF 26.4 billion and was accounted for in the fourth quarter of 2022 in one sum. Explanation to the segments in the following table below: 3; 4; 6: The segments distinguished by geographical basis contain banks in that country and sometimes other financial institutions (like leasing or factoring companies) or other companies. The incomes mainly arises from providing financial services like: collecting deposits, granting loans, leasing and treasury activities, payment and investment services and other financial services. 7: Merkantil Group conducts leasing activities in Hungary, originates its income from providing leasing services (financing cars and production equipment). 8: Incomes arising in this segment is mainly fee income of fund management companies in Hungary, Bulgaria, Romania, Ukraine based on capital in investment funds or assets in funds. 9: The activities of other Hungarian and foreign subsidiaries are very divergent, so their income also originates from different sources. The main part of the income in the Other subsidiaries segment comes from the activities of OTP Funds Servicing and Consulting, OTP Real Estate, OTP Real Estate Fund Management and PortfoLion Funds. 10: Net interest income of Corporate Centre includes interest expense on liabilities and interest income on assets allocated into this segment. INTEGRATED ANNUAL REPORT 2022 532 OTP BANK IFRS REPORT (CONSOLIDATED) NOTE 49: SEGMENT REPORTING BY BUSINESS AND GEOGRAPHICAL SEGMENTS (in HUF mn) [continued] Information regarding the Group’s reportable segments is presented below: As at 31 December 2022 Main components of the consolidated statement of profit or loss in HUF million Profit after income tax for the year from continued and discontinued operations Profit after income tax for the year from discontinued operations Profit after income tax for the year from continued operations Adjustments (total) Dividends and net cash transfers (after income tax) Goodwill /investment impairment (after income tax) Special tax on financial institutions (after income tax) Effect of acquisition (after income tax) Expected one-off negative effect of the debt repayment moratorium in Hungary (after income tax) Result of the treasury share swap agreement at OTP Core (after income tax) Loss allowance on Russian government bonds at OTP Core and DSK Bank (after income tax) Effect of the winding up of Sberbank Hungary (after income tax) Expected one-off effect of the extension of the interest rate cap for certain retail loans in Hungary (after income tax) ( ) used at: provisions, impairment and expenses OTP Group - in the consolidated statement of profit or loss - structure of accounting reports a Adjustments on the accounting in Recognized Income b OTP Group - in the consolidated statement of profit or loss - structure of management reports 1=a+b 347,081 11,444 335,637 (245,468) 1,927 (59,254) (91,353) (15,594) (2,473) 3,028 (34,775) (10,389) (36,585) 347,081 11,444 335,637 (245,468) 1,927 (59,254) (91,353) (15,594) (2,473) 3,028 (34,775) (10,389) (36,585) INTEGRATED ANNUAL REPORT 2022 533 OTP BANK IFRS REPORT (CONSOLIDATED) NOTE 49: SEGMENT REPORTING BY BUSINESS AND GEOGRAPHICAL SEGMENTS (in HUF mn) [continued] Information regarding the Group’s reportable segments is presented below [continued]: As at 31 December 2022 [continued] Main components of the consolidated statement of profit or loss in HUF million Consolidated adjusted profit after income tax for the year Profit before income tax Adjusted operating profit Adjusted total income Adjusted net interest income Adjusted net profit from fees and commissions Adjusted other net non-interest income Adjusted other administrative expenses Personnel expenses Depreciation and amortization Other general expenses Gains from derecognition of financial assets at amortized cost Modification loss Total risk costs Adjusted loss allowance on financial assets and liabilities (without the effect of revaluation of FX) Goodwill impairment Other impairment (adjustment) from this: Adjusted impairment under IAS 36 Income tax Total Assets Total Liabilities ( ) used at: provisions, impairment and expenses OTP Group - in the consolidated statement of profit or loss - structure of accounting reports Adjustments on the accounting in Recognized Income OTP Group - in the consolidated statement of profit or loss - structure of management reports a b 1=a+b; 1=2+3+4+5 Hungarian segment and other foreign subsidiaries not reported in "Foreign bank segment" subtotal (without adjustments) 2 Foreign banks in EU subtotal (without adjustments) Foreign banks not in EU subtotal (without adjustments) Eliminations and adjustments 3 4 5 335,637 394,888 734,658 1,709,806 1,091,314 600,360 18,132 (975,148) (402,563) (107,588) (464,997) (1,655) (39,997) (298,118) (210,458) (67,715) (19,945) (4,185) (59,251) 32,804,210 29,481,898 256,911 295,134 138,957 (48,107) 2,265 (203,242) 152,870 187,064 6,259 22,925 157,880 - 40,822 115,355 70,929 67,715 (23,289) 888 (38,223) - - 592,548 690,022 873,615 1,661,699 1,093,579 397,118 171,002 (788,084) (396,304) (84,663) (307,117) (1,655) 825 (182,763) (139,529) - (43,234) (3,297) (97,474) 32,804,210 29,481,898 304,293 353,561 361,426 759,142 448,001 207,941 103,200 (397,716) (179,651) (46,891) (171,174) (7,342) - (523) 34,015 - (34,538) (1,356) (49,268) - 21,275,751 17,337,096 189,617 217,950 232,797 446,844 303,256 - 113,606 29,982 (214,047) (108,850) (18,928) (86,269) 1,746 20 (16,613) (9,672) - (6,941) (774) (28,333) - 12,650,295 11,104,567 92,869 110,918 278,563 470,700 341,577 - 78,675 50,448 (192,137) (108,716) (18,482) (64,939) 3,933 805 (172,383) (163,792) - (8,591) (1,166) (18,049) - 6,452,844 5,452,540 5,769 7,593 829 (14,987) 745 (3,104) (12,628) 15,816 913 (362) 15,265 8 - 6,756 (80) - 6,836 (1) (1,824) (7,574,680) (4,412,305) INTEGRATED ANNUAL REPORT 2022 534 OTP BANK IFRS REPORT (CONSOLIDATED) NOTE 49: SEGMENT REPORTING BY BUSINESS AND GEOGRAPHICAL SEGMENTS (in HUF mn) [continued] Information regarding the Group’s reportable segments is presented below [continued]: As at 31 December 2022 [continued] Main components of the consolidated statement of profit or loss in HUF million [continued] Consolidated adjusted profit after income tax for the year Profit before income tax Adjusted operating profit Adjusted total income Adjusted net interest income Adjusted net profit from fees and commissions Adjusted other net non-interest income Adjusted other administrative expenses Personnel expenses Depreciation and amortization Other general expenses Gains from derecognition of financial assets at amortized cost Modification loss Total risk costs Adjusted loss allowance on financial assets and liabilities (without the effect of revaluation of FX) Goodwill impairment Other impairment (adjustment) from this: Adjusted impairment under IAS 36 Income tax Total Assets Total Liabilities ( ) used at: provisions, impairment and expenses Hungarian segment and other foreign subsidiaries not reported in "Foreign bank segment" subtotal (without adjustments) 2=6+…+10 OTP CORE (Hungary) Merkantil Group (Hungary) Asset Management subsidiaries Other subsidiaries Corporate Centre 6 7 8 9 10 304,293 353,561 361,426 759,142 448,001 207,941 103,200 (397,716) (179,651) (46,891) (171,174) (7,342) - (523) 34,015 - (34,538) (1,356) (49,268) 253,230 296,670 299,378 642,591 412,611 176,830 53,150 (343,213) (157,512) (40,536) (145,165) (7,198) - 4,490 34,925 - (30,435) (58) (43,440) 21,275,751 17,337,096 15,758,292 13,742,272 10,971 12,616 13,945 24,780 22,537 921 1,322 (10,835) (5,371) (1,462) (4,002) (144) - (1,185) (939) - (246) (18) (1,645) 948,735 891,144 9,619 10,870 10,955 15,799 32 15,242 525 (4,844) (2,905) (251) (1,688) - - (85) - - (85) 14 (1,251) 29,916 11,180 27,505 29,982 33,725 70,921 7,770 14,948 48,203 (37,196) (13,752) (4,640) (18,804) - - (3,743) 29 - (3,772) (1,294) (2,477) 2,968 3,423 3,423 5,051 5,051 - - (1,628) (111) (2) (1,515) - - - - - - - (455) 690,628 293,169 3,848,180 2,399,331 INTEGRATED ANNUAL REPORT 2022 535 OTP BANK IFRS REPORT (CONSOLIDATED) NOTE 49: SEGMENT REPORTING BY BUSINESS AND GEOGRAPHICAL SEGMENTS (in HUF mn) [continued] Information regarding the Group’s reportable segments is presented below [continued]: As at 31 December 2022 [continued] Main components of the consolidated statement of profit or loss in HUF million [continued] Foreign banks in EU subtotal (without adjustments) 3=11+…+14 DSK Bank AD (Bulgaria) OTP banka d.d. (Croatia) SKB Banka d.d. (Slovenia) 11 12 13 OTP Bank Romania S.A. (Romania) 14 Consolidated adjusted profit after income tax for the year Profit before income tax Adjusted operating profit Adjusted total income Adjusted net interest income Adjusted net profit from fees and commissions Adjusted other net non-interest income Adjusted other administrative expenses Personnel expenses Depreciation and amortization Other general expenses Gains from derecognition of financial assets at amortized cost Modification loss Total risk costs Adjusted loss allowance on financial assets and liabilities (without the effect of revaluation of FX) Goodwill impairment Other impairment (adjustment) from this: Adjusted impairment under IAS 36 Income tax Total Assets Total Liabilities ( ) used at: provisions, impairment and expenses 189,617 217,950 232,797 446,844 303,256 113,606 29,982 (214,047) (108,850) (18,928) (86,269) 1,746 20 (16,613) (9,672) (6,941) (774) (28,333) 12,650,295 11,104,567 119,884 132,564 142,393 230,844 145,461 68,755 16,628 (88,451) (41,946) (7,831) (38,674) 1,249 - (11,078) (12,251) - 1,173 (367) (12,680) 5,946,815 5,167,720 42,801 52,095 48,973 102,001 70,547 24,692 6,762 (53,028) (27,020) (4,845) (21,163) 578 - 2,544 6,564 - (4,020) 122 (9,294) 23,859 29,569 24,046 51,403 33,688 15,416 2,299 (27,357) (15,278) (1,671) (10,408) - 20 5,503 7,028 - (1,525) (53) (5,710) 3,224,955 2,834,372 1,790,944 1,596,100 3,073 3,722 17,385 62,596 53,560 4,743 4,293 (45,211) (24,606) (4,581) (16,024) (81) - (13,582) (11,013) - (2,569) (476) (649) 1,687,581 1,506,375 INTEGRATED ANNUAL REPORT 2022 536 OTP BANK IFRS REPORT (CONSOLIDATED) NOTE 49: SEGMENT REPORTING BY BUSINESS AND GEOGRAPHICAL SEGMENTS (in HUF mn) [continued] Information regarding the Group’s reportable segments is presented below [continued]: As at 31 December 2022 [continued] Main components of the consolidated statement of profit or loss in HUF million [continued] Foreign banks not in EU subtotal (without adjustments) 4=15+…+20 OTP banka Srbija a.d. (Serbia) 15 OTP Bank JSC (Ukraine) 16 JSC "OTP Bank" (Russia) and Touch Bank 17 Crnogorska komercijalna banka a.d. (Montenegro) 18 Banka OTP Albania SHA (Albania) 19 OTP Bank S.A. (Moldova) 20 Consolidated adjusted profit after income tax for the year Profit before income tax Adjusted operating profit Adjusted total income Adjusted net interest income Adjusted net profit from fees and commissions Adjusted other net non-interest income Adjusted other administrative expenses Personnel expenses Depreciation and amortization Other general expenses Gains from derecognition of financial assets at amortized cost Modification loss Total risk costs Adjusted loss allowance on financial assets and liabilities (without the effect of revaluation of FX) Goodwill impairment Other impairment (adjustment) from this: Adjusted impairment under IAS 36 Income tax Total Assets Total Liabilities ( ) used at: provisions, impairment and expenses 92,869 110,918 278,563 470,700 341,577 78,675 50,448 (192,137) (108,716) (18,482) (64,939) 3,933 805 (172,383) (163,792) (8,591) (1,166) (18,049) 36,873 42,991 58,543 104,523 76,635 17,954 9,934 (45,980) (23,342) (3,342) (19,296) 1,300 2,062 (18,914) (17,783) - (1,131) (151) (6,118) (15,923) (13,205) 79,862 110,805 90,007 12,673 8,125 (30,943) (18,170) (2,570) (10,203) 286 (1,245) (92,108) (89,877) - (2,231) (33) (2,718) 6,452,844 5,452,540 2,708,993 2,350,873 1,048,713 926,221 42,548 46,180 98,137 178,494 118,004 35,251 25,239 (80,357) (50,404) (8,712) (21,241) 3,284 - (55,241) (54,330) - (911) (263) (3,632) 1,029,721 723,417 9,792 11,976 15,134 28,816 20,832 7,106 878 (13,682) (6,529) (1,711) (5,442) (80) (12) (3,066) 731 - (3,797) (677) (2,184) 664,395 565,264 10,174 12,187 9,335 20,232 16,927 3,067 238 (10,897) (4,318) (1,023) (5,556) (671) - 3,523 3,176 - 347 - (2,013) 635,364 574,537 9,405 10,789 17,552 27,830 19,172 2,624 6,034 (10,278) (5,953) (1,124) (3,201) (186) - (6,577) (5,709) - (868) (42) (1,384) 365,658 312,228 INTEGRATED ANNUAL REPORT 2022 537 OTP BANK IFRS REPORT (CONSOLIDATED) NOTE 49: SEGMENT REPORTING BY BUSINESS AND GEOGRAPHICAL SEGMENTS (in HUF mn) [continued] Information regarding the Group’s reportable segments is presented below [continued]: As at 31 December 2021 Main components of the consolidated statement of profit or loss in HUF million Profit after income tax for the year from continued and discontinued operations Profit after income tax for the year from discontinued operations Profit after income tax for the year from continued operations Adjustments (total) Dividends and net cash transfers (after income tax) Goodwill /investment impairment (after income tax) Bank tax on financial institutions (after income tax) Effect of acquisition (after income tax) Expected one-off negative effect of the debt re- payment moratorium in Hungary (after income tax) Result of the treasury share swap agreement at OTP Core (after income tax) ( ) used at: provisions, impairment and expenses OTP Group - in the consolidated statement of profit or loss - structure of accounting reports a Adjustments on the accounting in Recognized Income b OTP Group - in the consolidated statement of profit or loss - structure of management reports 1=a+b 456,428 116 456,312 (40,475) 729 1,909 (18,893) (15,506) (15,040) 6,326 456,428 116 456,312 (40,475) 729 1,909 (18,893) (15,506) (15,040) 6,326 INTEGRATED ANNUAL REPORT 2022 538 OTP BANK IFRS REPORT (CONSOLIDATED) NOTE 49: SEGMENT REPORTING BY BUSINESS AND GEOGRAPHICAL SEGMENTS (in HUF mn) [continued] Information regarding the Group’s reportable segments is presented below [continued]: As at 31 December 2021 [continued] Main components of the consolidated statement of profit or loss in HUF million OTP Group - in the consolidated statement of profit or loss - structure of accounting reports Adjustments on the accounting in Recognized Income OTP Group - in the consolidated statement of profit or loss - structure of management reports a b 1=a+b; 1=2+3+4+5 Hungarian segment and other foreign subsidiaries not reported in "Foreign bank segment" subtotal (without adjustments) 2 Foreign banks in EU subtotal (without adjustments) Foreign banks not in EU subtotal (without adjustments) Eliminations and adjustments 3 4 5 Consolidated adjusted profit after income tax for the year Profit before income tax Adjusted operating profit Adjusted total income Adjusted net interest income Adjusted net profit from fees and commissions Adjusted other net non-interest income Adjusted other administrative expenses Personnel expenses Depreciation and amortization Other general expenses Gains from derecognition of financial assets at amortized cost Modification loss Total risk costs Adjusted loss allowance on financial assets and liabilities (without the effect of revaluation of FX) Other impairment (adjustment) from this: adjusted impairment under IAS 36 Income tax Total Assets 1 Total Liabilities 1 Relating to the discontinued operations the assets were HUF 2,046 million. ( ) used at: provisions, impairment and expenses 456,312 528,435 597,770 1,345,382 874,310 442,174 28,898 (747,612) (340,684) (94,996) (311,932) 1,885 (13,672) (57,548) (47,645) (9,903) (9,903) (72,123) 27,551,338 24,516,618 44,071 62,899 61,589 (33,290) 9,702 (116,626) 73,634 94,879 483 22,180 72,216 (1) 10,131 (8,820) 7,809 (16,629) 437 (18,828) - - 500,383 591,334 659,359 1,312,092 884,012 325,548 102,532 (652,733) (340,201) (72,816) (239,716) 1,884 (3,541) (66,368) (39,836) (26,532) (9,466) (90,951) 27,551,338 24,516,618 240,838 284,803 299,431 632,013 392,588 177,034 62,391 (332,582) (163,957) (42,088) (126,537) (1,791) (3,397) (9,440) 2,010 (11,450) (6,190) (43,965) 131,309 152,663 178,192 356,257 237,745 90,092 28,420 (178,065) (91,350) (16,383) (70,332) 1,814 (14) (27,329) (23,973) (3,356) (3,001) (21,354) 124,272 148,419 183,171 335,934 252,782 63,699 19,453 (152,763) (85,606) (13,966) (53,191) 1,862 (130) (36,484) (21,918) (14,566) (274) (24,147) 3,964 5,449 (1,435) (12,112) 897 (5,277) (7,732) 10,677 712 (379) 10,344 (1) - 6,885 4,045 2,840 (1) (1,485) 18,637,440 14,861,117 10,075,267 8,680,440 5,183,118 4,316,145 (6,344,487) (3,341,084) INTEGRATED ANNUAL REPORT 2022 539 OTP BANK IFRS REPORT (CONSOLIDATED) NOTE 49: SEGMENT REPORTING BY BUSINESS AND GEOGRAPHICAL SEGMENTS (in HUF mn) [continued] Information regarding the Group’s reportable segments is presented below [continued]: As at 31 December 2021 [continued] Main components of the consolidated statement of profit or loss in HUF million [continued] Consolidated adjusted profit after income tax for the year Profit before income tax Adjusted operating profit Adjusted total income Adjusted net interest income Adjusted net profit from fees and commissions Adjusted other net non-interest income Adjusted other administrative expenses Personnel expenses Depreciation and amortization Other general expenses Gains from derecognition of financial assets at amortized cost Modification loss Total risk costs Adjusted loss allowance on financial assets and liabilities (without the effect of revaluation of FX) Other impairment (adjustment) from this: adjusted impairment under IAS 36 Income tax Total Assets Total Liabilities ( ) used at: provisions, impairment and expenses Hungarian segment and other foreign subsidiaries not reported in "Foreign bank segment" subtotal (without adjustments) 2=6+…+10 OTP CORE (Hungary) Merkantil Group (Hungary) Asset Management subsidiaries Other subsidiaries Corporate Centre 6 7 8 9 10 240,838 284,803 299,431 632,013 392,588 177,034 62,391 (332,582) (163,957) (42,088) (126,537) (1,791) (3,397) (9,440) 2,010 (11,450) (6,190) (43,965) 213,378 253,972 256,151 545,185 369,309 150,578 25,298 (289,034) (143,234) (36,926) (108,874) (1,598) (3,397) 2,816 4,910 (2,094) 70 (40,594) 18,637,440 14,861,117 14,205,354 12,195,467 7,998 8,916 11,961 23,291 20,680 116 2,495 (11,330) (4,654) (1,428) (5,248) (193) - (2,852) (2,900) 48 179 (918) 782,222 722,976 6,321 7,138 7,141 11,064 4 10,786 274 (3,923) (2,443) (231) (1,249) - - (3) - (3) (14) (817) 10,254 11,777 23,938 51,213 1,335 15,554 34,324 (27,275) (13,531) (3,501) (10,243) - - (12,161) - (12,161) (6,425) (1,523) 2,887 3,000 240 1,260 1,260 - - (1,020) (95) (2) (923) - - 2,760 - 2,760 - (113) 27,753 12,610 512,742 236,701 3,109,369 1,693,363 INTEGRATED ANNUAL REPORT 2022 540 OTP BANK IFRS REPORT (CONSOLIDATED) NOTE 49: SEGMENT REPORTING BY BUSINESS AND GEOGRAPHICAL SEGMENTS (in HUF mn) [continued] Information regarding the Group’s reportable segments is presented below [continued]: As at 31 December 2021 [continued] Main components of the consolidated statement of profit or loss in HUF million [continued] Foreign banks in EU subtotal (without adjustments) 3=11+…+14 DSK Bank AD (Bulgaria) OTP banka d.d. (Croatia) SKB Banka d.d. (Slovenia) 11 12 13 OTP Bank Romania S.A. (Romania) 14 Consolidated adjusted profit after income tax for the year Profit before income tax Adjusted operating profit Adjusted total income Adjusted net interest income Adjusted net profit from fees and commissions Adjusted other net non-interest income Adjusted other administrative expenses Personnel expenses Depreciation and amortization Other general expenses Gains from derecognition of financial assets at amortized cost Modification loss Total risk costs Adjusted loss allowance on financial assets and liabilities (without the effect of revaluation of FX) Other impairment (adjustment) from this: adjusted impairment under IAS 36 Income tax Total Assets Total Liabilities ( ) used at: provisions, impairment and expenses 131,309 152,663 178,192 356,257 237,745 90,092 28,420 (178,065) (91,350) (16,383) (70,332) 1,814 (14) (27,329) (23,973) (3,356) (3,001) (21,354) 10,075,267 8,680,440 76,789 85,243 106,240 178,470 112,869 54,508 11,093 (72,230) (34,284) (7,160) (30,786) 1,893 - (22,890) (20,831) (2,059) (2,401) (8,454) 4,627,132 3,927,757 33,446 41,064 43,421 88,735 60,933 18,183 9,619 (45,314) (23,111) (4,392) (17,811) 1,449 - (3,806) 318 (4,124) (135) (7,618) 16,822 20,660 19,595 42,354 27,673 13,258 1,423 (22,759) (13,015) (1,350) (8,394) - (14) 1,079 1,833 (754) - (3,838) 2,576,445 2,225,422 1,433,206 1,253,691 4,252 5,696 8,936 46,698 36,270 4,143 6,285 (37,762) (20,940) (3,481) (13,341) (1,528) - (1,712) (5,293) 3,581 (465) (1,444) 1,438,484 1,273,570 INTEGRATED ANNUAL REPORT 2022 541 OTP BANK IFRS REPORT (CONSOLIDATED) NOTE 49: SEGMENT REPORTING BY BUSINESS AND GEOGRAPHICAL SEGMENTS (in HUF mn) [continued] Information regarding the Group’s reportable segments is presented below [continued]: As at 31 December 2021 [continued] Main components of the consolidated statement of profit or loss in HUF million [continued] Consolidated adjusted profit after income tax for the year Profit before income tax Adjusted operating profit Adjusted total income Adjusted net interest income Adjusted net profit from fees and commissions Adjusted other net non-interest income Adjusted other administrative expenses Personnel expenses Depreciation and amortization Other general expenses Gains from derecognition of financial assets at amortized cost Modification loss Total risk costs Adjusted loss allowance on financial assets and liabilities (without the effect of revaluation of FX) Other impairment (adjustment) from this: adjusted impairment under IAS 36 Income tax Total Assets Total Liabilities ( ) used at: provisions, impairment and expenses Foreign banks not in EU subtotal (without adjustments) 4=15+…+20 OTP banka Srbija a.d. (Serbia) 15 OTP Bank JSC (Ukraine) 16 JSC "OTP Bank" (Russia) and Touch Bank 17 Crnogorska komercijalna banka a.d. (Montenegro) 18 Banka OTP Albania SHA (Albania) 19 OTP Bank S.A. (Moldova) 20 124,272 148,419 183,171 335,934 252,782 63,699 19,453 (152,763) (85,606) (13,966) (53,191) 1,862 (130) (36,484) (21,918) (14,566) (274) (24,147) 32,104 35,714 40,754 83,493 62,497 14,410 6,586 (42,739) (22,569) (2,820) (17,350) 554 - (5,594) (941) (4,653) (245) (3,610) 5,183,118 4,316,145 2,224,715 1,918,085 39,025 47,267 54,761 83,567 62,051 14,494 7,022 (28,806) (16,580) (2,131) (10,095) 916 (130) (8,280) (6,613) (1,667) (3) (8,242) 983,557 823,801 37,624 47,314 62,368 118,158 91,364 25,728 1,066 (55,790) (33,773) (6,263) (15,754) 467 - (15,521) (13,542) (1,979) 24 (9,690) 799,965 559,241 4,139 4,956 10,240 22,046 16,553 4,880 613 (11,806) (5,805) (1,461) (4,540) (31) - (5,253) 677 (5,930) (51) (817) 513,522 431,495 5,521 6,507 7,212 13,398 10,619 1,843 936 (6,186) (2,794) (559) (2,833) (33) - (672) (847) 175 1 (986) 5,859 6,661 7,836 15,272 9,698 2,344 3,230 (7,436) (4,085) (732) (2,619) (11) - (1,164) (652) (512) - (802) 350,848 315,713 310,511 267,810 INTEGRATED ANNUAL REPORT 2022 542 OTP BANK IFRS REPORT (CONSOLIDATED) NOTE 50: ASSET CLASSIFIED AS HELD-FOR-SALE AND DISCONTINUED OPERATIONS (in HUF mn) Discontinued operation The Serbian Pevec d.o.o. Beograd company as the investment of OTP Factoring Ltd. was classified as asset held- for-sale by the Group as at 31 December, 2021. This investment was not revalued in the Consolidated Financial Statements. Classification as asset held-for-sale was needed due to the purchase agreement had been concluded already in 2021 for the real estates in the ownership of Pevec. In the first half year of 2022, the purchase price was paid out and the transfer of ownership happened. The purchase price of the sold real estate was EUR 9,918,995. the estimated value of those real estates which weren’t sold was defined in the amount of EUR 300,000 by a value assessment in January 2021. These assets which were classified as held-for-sale in the amount of HUF 2,046 million at the end of 31 December 2021 were eliminated during the first half year of 2022 from these Consolidated Financial Statements. Asset classified as held-for-sale On 2 November 2022, the Group sold its share in the associated company Szállás.hu Zrt. to the Polish Wirtualna Polska Media S.A. The whole company was sold for EUR 83 million. The Group's gain recognized in the year under review related to the transaction was HUF 10,458 million, which is presented in the Other income. INTEGRATED ANNUAL REPORT 2022 543 OTP BANK IFRS REPORT (CONSOLIDATED) NOTE 51: SIGNIFICANT EVENTS DURING THE YEAR ENDED 31 DECEMBER 2022 1) Term Note Program See details in Note 21. 2) Purchase of the majority stake in the Uzbek Ipoteka Bank On 12 December 2022 OTP Bank signed a purchase and sale contract for the purchase of the majority stake of Ipoteka Bank and its subsidiaries with the Ministry of Finance of the Republic of Uzbekistan. OTP Bank will purchase 100% of the shares held by the Ministry of Finance of the Republic of Uzbekistan (nearly 97% total shareholding) in two steps: 75% of the shares now and the remaining 25% three years after the financial closing of the first transaction. Ipoteka Bank is the fifth largest bank in Uzbekistan, with a market share of 8.5% based on total assets on 1 October 2022, with more than 1.6 million retail customers and a significant corporate clientele. The financial closure of the first transaction is expected in the second quarter of 2023 subject to obtaining all the necessary regulatory approvals. 3) Joint venture company in China On 2 June 2022 OTP Bank Plc executed transaction agreements with its partners to establish a consumer finance joint venture company as a greenfield investment in China, with a 15% shareholding. 4) Special taxes on financial institutions Pursuant to Government Decree No. 197/2022 published on 4 June 2022, the Hungarian Government decided to impose a windfall tax on credit institutions and financial enterprises temporarily, that is for 2022 and 2023. As for 2022, the base of the windfall tax is the net revenues based on the 2021 financial statements, calculated according to local tax law, whereas the tax rate is 10%. The after-tax effect of the special tax on financial institutions payable in Hungary since 2010 reached HUF 20.2 billion for full-year 2022, the whole amount was booked in the first quarter. Furthermore, for 2022 the after-tax burden of the windfall tax was HUF 67.9 billion, accounted for in a lump sum in the second quarter. Thirdly, the newly introduced special tax on certain companies in Croatia was booked in the fourth quarter of 2022 with an after-tax effect of HUF (3.2) billion. 5) Maturity of OTP MOL Swap The amended final maturity of the share swap agreement concluded with MOL Plc (“MOL”) on 16 April 2009 – whereby OTP has exchanged 24.000.000 OTP ordinary shares for 5.010.501 (from 28 September 2017 for 40.084.008) „A” series MOL ordinary shares – is 11 July 2027, until which each party can initiate cash or physical settlement of the transaction. 6) Prolongation of deadline of loan moratorium and interest rate cap See details in Note 4. 7) Interest benchmark reform The Group was actively involved in industry efforts supporting transition to IBOR alternatives. The Group has taken extensive steps to prepare for the discontinuation of IBORs and worked closely with clients to ensure awareness and support transition activities. As the transition is complex, time-consuming process and relevant for the whole Group, the management of Group has evaluated the impacts of the interest rate benchmarks reform, preparing itself for the transition through a dedicated internal group-wide project. As LIBOR’s five currencies (USD, GBP, EUR, JPY and CHF) and EONIA will be replaced by Risk Free Rates – which are different in nature compared to IBOR rates – OTP Group has implemented the relevant rates into the IT systems and reached out the clients. The Group’s priority was to ensure that the Group can continue to offer clients the products and services they need, while also supporting them in the transition to the new alternative Risk-Free Rates. INTEGRATED ANNUAL REPORT 2022 544 OTP BANK IFRS REPORT (CONSOLIDATED) NOTE 51: SIGNIFICANT EVENTS DURING THE YEAR ENDED 31 DECEMBER 2022 [continued] 7) Interest benchmark reform [continued] During the IBOR reform the Group identified several risks at the beginning of 2021, which the project had to manage and monitor closely. These risks include but are not limited to the following: • The abolution of LIBOR affected several transactions that may require automated IT solutions, • The new reference rates are different in nature from LIBOR that cause difficulties to settle the value • differences with the customers, It was necessary to implement new processes not to develop LIBOR based products, and to develop a strategy for removing or modifying the affected products handled by the Group, • After the termination of LIBOR, the Group has to act under the "Fallback clauses", the clauses that regulate the replacement of the reference interest rates in the contract and the use of an alternative interest as a reference. The content of these clauses needs to be clearly defined and checked from a business point of view, ie which reference interest rate will be applied instead of LIBOR for the given contract and whether it is commercially appropriate. In defining the fallback clauses, efforts had to be made to provide a viable alternative to the termination of LIBOR that would not result in a business loss for the Group. • Legal risks related to the termination of LIBOR. Such risks can arise when Fallback clauses are not included in the contracts, or the law governing the contract doesn’t contain a statutory reference rate. In these cases, the contracts can be cancelled due to impossibility or the termination by either party. • Missing of contractual interest rates can result in settlement disputes, compensation cases or litigation. • Business risks of the termination of LIBOR. The most significant of these are: ▪ the law governing the contract can set the applicable interest rate that can be result in a business loss for the Group, ▪ business loss due to negative customer experience, ▪ operational risk, when several unique contracts must be handled in a short time. Terminating interest rates Alternative Reference Rates LIBOR USD1 (1 week and 2 months settings), FedFund Rate LIBOR GBP LIBOR JPY LIBOR EUR LIBOR CHF2 EONIA SOFR SONIA TONA EURIBOR SARON €STR 1 The following USD LIBOR settings will be terminated after June 30, 2023: overnight and 1, 3, 6 and 12 Months. The affected USD LIBOR contracts will be handled on an ongoing basis until the remaining USD LIBOR settings’ cessation date. 2 In the case of CHF LIBOR, OTP Bank acts in accordance with the implementing regulation of the European Commission (https://eur- lex.europa.eu/legal-content/EN/TXT/PDF/?uri=PI_COM:C(2021)7488&from=EN). Amounts effected by IBOR reform as at 31 December 2022 Reference rate Type of the contract Nominal value of the contract Pieces of contracts USD LIBOR USD LIBOR USD LIBOR Other LIBOR Other LIBOR Other LIBOR Total Loan Deposit Derivatives Loan Derivatives Bonds (assets) 139,883 27,697 451,042 16,065 25,593 5,319 665,599 2,299 43 113 1,293 4 1 3,753 The above LIBOR-based amounts outstanding as at 31 December 2022 will be managed at the next first interest period therefore they do not cause a risk to the Group or to the customers. INTEGRATED ANNUAL REPORT 2022 545 OTP BANK IFRS REPORT (CONSOLIDATED) NOTE 51: SIGNIFICANT EVENTS DURING THE YEAR ENDED 31 DECEMBER 2022 [continued] 8) Risk relating to the Russian-Ukrainian armed conflict On 24 February 2022 Russia launched a military operation against Ukraine which is still ongoing at the date of this Report. Until now many countries, as well as the European Union imposed sanctions due to the armed conflict on Russia and Russian businesses and citizens. Russia responded to these sanctions with similar measures. The armed conflict and the international sanctions influence the business and economic activities significantly all around the world. There are a number of factors associated with the Russian-Ukrainian armed conflict and the international sanctions as well as their impact on global economies that could have a material adverse effect on (among other things) the profitability, capital and liquidity of financial institutions such as the OTP Group. The armed conflict and the international sanctions cause significant economic damage to the affected parties and in addition they cause disruptions in the global economic processes, of which the precise consequences (inter alia the effects on energy and grain markets, the global transport routes and international trade as well as tourism) are difficult to be estimated at the moment. It remains unclear how this will evolve through 2022 and the OTP Group continues to monitor the situation closely. However, the OTP Group's ability to conduct business may be adversely affected by disruptions to its infrastructure, business processes and technology services. This may cause significant customer detriment, costs to reimburse losses incurred by the OTP Group’s customers, and reputational damage. Furthermore, the OTP Group relies on models to support a broad range of business and risk management activities, including informing business decisions and strategies, measuring and limiting risk, valuing exposures, conducting stress testing and assessing capital adequacy. Models are, by their nature, imperfect and incomplete representations of reality because they rely on assumptions and inputs, and as such assumptions may later potentially prove to be incorrect, this can affect the accuracy of their outputs. This may be exacerbated when dealing with unprecedented scenarios, such as the Russian-Ukrainian armed conflict and the international sanctions, due to the lack of reliable historical reference points and data. Any and all such events mentioned above could have a material adverse effect on the OTP Group’s business, financial condition, results of operations, prospects, liquidity, capital position and credit ratings, as well as on the OTP Group’s customers, employees and suppliers. INTEGRATED ANNUAL REPORT 2022 546 OTP BANK IFRS REPORT (CONSOLIDATED) NOTE 52: POST BALANCE SHEET EVENTS Summary of economic policy measures made and other relevant regulatory changes as post-balance sheet events In the section below, the measures and developments which have been made since the balance sheet date, and – in OTP Bank’s view – are relevant and have materially influenced / can materially influence the operation of the Group members. OTP Bank excludes any liability for the completeness and accuracy of the measures presented herein. Hungary • On 4 January 2023 OTP Bank announced that the National Bank of Hungary imposed the below additional capital requirements for OTP Group, on consolidated level, effective from 1 January 2023 until the next review: o o o 1.13%-points in case of the Common Equity Tier1 (CET1) capital, accordingly the minimum requirement for the consolidated CET1 ratio is 5.63% (without regulatory capital buffers); 1.50%-points in case of the Tier1 capital, accordingly the minimum requirement for the consolidated Tier1 ratio is 7.50% (without regulatory capital buffers); 2.00%-points in case of the Total SREP Capital Requirement (TSCR), accordingly the minimum requirement for the consolidated capital adequacy ratio is 10.00% (without regulatory capital buffers). • On 23 January 2023 the Ministry of Economic Development announced that the Gábor Baross Reindustrialization Loan Programme will be launched from February by Eximbank, with a total available amount of HUF 700 billion. Under the scheme, the HUF and EUR denominated loans will be available for all purposes, depending on the loan amount either through commercial banks or directly through Eximbank, but all the funding need will be provided or refinanced by Eximbank. The interest rate of the loans will be fixed throughout the whole tenor and will be typically maximum 6% in the case of HUF loans and maximum 3.5% in the case of EUR loans. • On 24 January 2023 the National Bank of Hungary kept the reference rates unchanged. The NBH held a long-term deposit tender on 25 January, and from 1 February discount bill auctions are held on a weekly basis. The NBH said that it will continue to meet foreign currency liquidity needs in the coming months to reach market balan ce related to the energy account. Furthermore, the Deputy Governor announced that effective from April the mandatory reserve requirement for banks will be increased from 5% to 10%. • On 27 January 2023 S&P Global Ratings lowered the long- and short-term foreign and local currency sovereign credit ratings on Hungary to 'BBB-/A-3' from 'BBB/A-2'. The outlook on the long-term ratings is stable. • According to the press release published on 30 January 2023 by S&P Global Ratings, the rating agency downgraded its long- and short-term issuer credit ratings, as well as the long- and short-term resolution counterparty ratings on OTP Bank Plc and OTP Mortgage Bank Ltd. to 'BBB-/A-3' from 'BBB/A-2', and the senior preferred debt rating of OTP Bank Plc was also downgraded by one notch to 'BBB-'. The outlook on the long-term issuer ratings is stable. • The financial completion of the transaction to purchase 100% shareholding of Nova KBM d.d. and its subsidiary in Slovenia – after obtaining all necessary regulatory approvals – has been completed on 6 February 2023. • According to the press release published on 6 February 2023 by Moody’s Investors Service, the rating agency concluded the ratings review initiated in July 2021. The rating agency downgraded OTP Bank’s subordinated bond rating by one notch to 'Ba2' from 'Ba1'. All other ratings and assessments of OTP Bank have been affirmed. Outlook is stable. • At the same time, Moody’s Investors Service downgraded the backed long-term domestic currency issuer rating of OTP Mortgage Bank to 'Baa3' from 'Baa2'. All other ratings and assessments of OTP Mortgage Bank have been affirmed. Outlook is stable. • On 15 February 2023 as value date OTP Bank issued Tier 2 Notes in the aggregate nominal amount of USD 650 million. The Tier 2 Notes with 10.25 years maturity, redeemable at par any time during the 3-month period prior to the Reset Date at 5.25 years, were priced on 8 February 2023. INTEGRATED ANNUAL REPORT 2022 547 OTP BANK IFRS REPORT (CONSOLIDATED) NOTE 52: POST BALANCE SHEET EVENTS [continued] Summary of economic policy measures made and other relevant regulatory changes as post-balance sheet events [continued] Bulgaria • On 17 February 2023 the Minister of Finance announced that the originally planned accession date to the Eurozone of 1 January 2024 will be postponed. The new target date will be declared by the new Parliament formed after the elections scheduled to 2 April. Serbia • On 12 January 2023 the central bank hiked the base rate by 25 bps to 5.25%. • On 9 February 2023 the central bank hiked the base rate by 25 bps to 5.5%. Slovenia • On 2 February 2023 the ECB hiked its key interest rate by 50 bps to 3.0%. • On 7 February 2023 Moody’s upgraded the deposit rating of NKBM to ’A3’, the outlook is stable. At the same time, the Bank’s unsecured non-preferred debt rating was upgraded to ’Baa3’. Romania • On 20 January 2023 the central bank hiked the base rate by 25 bps to 7%. Russia • Effective from 1 January 2023 the capital conservation buffer in Russia decreased temporarily to 0% from 2.5%, which does not affect the minimum requirement for OTP Group. Ukraine • Effective from 1 January 2023 the Ukrainian central bank raised the mandatory reserve requirement for local and foreign currency denominated deposits by 5-5 pps each, to 5% and 15%, respectively. • On 10 February 2023 Moody’s downgraded the Ukrainian sovereign credit rating from ’Caa’ to ’Ca’, the outlook is stable. Moldova • On 7 February 2023 Moldova's central bank cut its key rate to 17% from 20%. INTEGRATED ANNUAL REPORT 2022 548 OTHER INFORMATIONS INTEGRATED ANNUAL REPORT 2022 549 OTP BANK CORPORATE GOVERNANCE OTHER INFORMATIONS Senior officers, strategic employees and their shareholding of OTP shares as at 31 December 2022 Type1 Name Position IT IT IT IT IT IT IT IT IT IT IT FB FB FB FB FB FB SP SP dr. Sándor Csányi 2 Chairman and CEO Deputy Chairman Tamás Erdei member Gabriella Balogh member Mihály Baumstark member, Deputy CEO Péter Csányi member dr. István Gresa Antal Kovács3 member, Deputy CEO György Nagy4 member dr. Márton Gellért Vági member member dr. József Vörös member, Deputy CEO László Wolf Chairman Tibor Tolnay Deputy Chairman dr. Gábor Horváth member Klára Bella member dr. Tamás Gudra member András Michnai member Olivier Péqueux Deputy CEO László Bencsik Deputy CEO György Kiss-Haypál TOTAL No. of shares held by management: Commencement date of the term 15/05/1992 27/04/2012 16/04/2021 29/04/1999 16/04/2021 27/04/2012 15/04/2016 16/04/2021 16/04/2021 15/05/1992 15/04/2016 15/05/1992 19/05/1995 12/04/2019 16/04/2021 25/04/2008 13/04/2018 Expiration/termination of the term 2026 2026 2026 2026 2026 2026 2026 2026 2026 2026 2026 2023 2023 2023 2023 2023 2023 Number of shares 325.047 43.085 8.193 53.600 9.648 182.858 114.759 34.800 8.500 186.714 535.347 54 0 408 0 100 0 12.744 10.905 1,526,762 1 Employee in strategic position (SP), Board Member (IT), Supervisory Board Member (FB) 2 Number of OTP shares owned by Dr. Sándor Csányi, Chairman and CEO, directly or indirectly: 4,602,174 3 Number of OTP shares owned by Antal Kovács, Member of Board of Directors, directly or indirectly: 119,059 4 Number of OTP shares owned by György Nagy, Member of Board of Directors, directly or indirectly: 1,118,955 Board of Directors The members of the Board of Directors are elected by the General Meeting for a term of five years. Executive members: Dr. Sándor Csányi Chairman of the BoD Chairman & CEO He graduated from the College of Finance and Accounting in 1974 with a bachelor’s degree in business administration and in 1980 from the Karl Marx University of Economic Sciences (now: Corvinus University) with a master in economics and finance, where he also obtained his doctorate in finance between 1981-1983. He is a chartered auditor – certified in 1982 at the Ministry of Finance. After graduation he worked at the Tax Revenue Directorate and then at the Secretariat (Bank Supervision Section) of the Ministry of Finance. Between 1983 and 1986, he was a departmental head at the Ministry of Agriculture and Food Industry. From 1986 to 1989 he worked as a senior head of department at Hungarian Credit Bank (MHB). He was Deputy CEO of K&H Bank from 1989 to 1992. He has been the Chairman & CEO of OTP Bank Plc. since 1992. He is Vice Chairman of the Board of Directors of MOL Plc. and Co-Chairman of the Chinese-Hungarian Business Council. Owner of Bonitás 2002 Zrt. which is the holding company overlooking his investments in agriculture, food industry, real estate and asset management comprising of over 200 directly or indirectly owned companies. He is one of the largest investors in agriculture and food industry in the CEE region through Bonafarm Group and KITE generating aggregated annual revenue of EUR 2 billion with over 9,000 employees and with 40,000 hectares cultivated land in total. Bonafarm Group is vertically integrated whereby agriculture companies produce the raw materials for food processors. He has significant investments in real estate through his minority holding in Gránit Pólus (15%) and Limedale (18.2%) (portfolio of USD 1 billion), in VC (Bonitás Venture Capital Fund with EUR 20 million funds under management) and asset management (CSAM in Singapore). He has been the President of the Hungarian Football Association (MLSZ) since 2010, and a member of the UEFA Executive Committee since March 2015; and the Vice President of the UEFA Executive Committee since 2019. Since 2017 he has been a member of the FIFA Council and the Vice President of the FIFA Council INTEGRATED ANNUAL REPORT 2022 550 OTP BANK OTHER INFORMATIONS since 2018. Within UEFA he is also the Chairman of the UEFA National Team Competition Committee, a member of the UEFA Finance Committee and the UEFA Professional Football Strategy Council. He has been the owner of Pick Szeged Handball Club since 2011. He has been the Honorary Vice President of the International Judo Federation since 2008. Since 1995 he has been the Vice President of the Board of Trustees of the International Children’s Safety Service, and since 2003 he has been the Chairman of the Board of Trustees of the Prima Primissima Foundation. In 2005, he established the Csányi Foundation for Children from his own assets. Since 2009, he has been a member of the Board of Trustees of the Media Union for Social Awareness Formation Foundations. Since 2020, he has been the Chairman of the Board of Trustees of the Pro Sopron University Foundation. In 2021, he became Chairman of the Board of Trustees of the Foundation for the Hungarian Agricultural and Life Sciences University (MATE). As of 31 December 2022 he held 325,047 ordinary OTP shares (while the total number of OTP shares held by him directly and indirectly was 4,602,174). Péter Csányi member of the BoD Deputy CEO Digital Division He graduated from City University London in 2006 with a bachelor’s degree in economics, then in 2007 with a master’s degree in finance from the IE Business School in Madrid. In 2015, he received the Master of Business Administration (MBA) diploma from Kellogg School of Management in the USA. He began his career in 2006 at Merrill Lynch’s London office as an intern and he was working on corporate finance projects for financial institutions. From 2007 to 2011, he worked at Deutsche Bank's London office, first as an analyst and later as an associate in the field of corporate finance (for Central and Eastern European corporate customers). From 2011-2016, he worked for McKinsey & Company Inc. as an associate mostly working on banking related projects. He joined OTP Bank in 2016 as Managing Director of the Digital Sales and Development Directorate. After the agile transformation at the Bank, he became responsible for the management of the Omnichannel Tribe from 2019. In addition, since January 2021, he has been the head of the Daily Banking Tribe. From March 2021, he is the Deputy CEO of OTP Bank, the head of the IT Division (as of 1 May 2021 Digital Division). From 2020 he has been Chairman of the Supervisory Board of OTP banka d.d. in Croatia. He is also a member of the OTP Mobil Kft. Supervisory Board and the Board of Directors of PortfoLion Ltd. He is also the head of the Digitization Working Group of the Hungarian Banking Association and a member of the Mastercard European Advisory Board. He has been a member of OTP Bank's Board of Directors since 16 April 2021. As of 31 December 2022 he held 9,648 ordinary OTP share. Antal György Kovács member of the BoD Deputy CEO Retail Division He graduated from the Karl Marx University of Economic Sciences with a degree in economics. He began his professional career in 1990 at the Nagyatád branch of K&H Bank, where he worked as a branch manager between 1993 and 1995. He has been working at OTP Bank Plc. since 1995, first as a county director and from 1998 as the executive director of OTP Bank’s South Transdanubian Region. Since 1 July 2007 he has been OTP Bank’s Deputy CEO, until 31 December 2022 he was the head of Retail Division. INTEGRATED ANNUAL REPORT 2022 551 OTP BANK OTHER INFORMATIONS He has received additional training at the International Training Centre for Bankers and on various courses held by the World Trade Institute. Between April 2007 and April 2012 he was Chairman of the Supervisory Board of OTP banka Hrvatska d.d. He has been Chairman of the Supervisory Board of OTP Bank Romania SA since 12 December 2012. He has been Chairman of the Board of Directors of OTP Mortgage Bank Ltd. and OTP Building Society Ltd. since 24 April 2014. He is Chairman of the Supervisory Board of OTP Fund Management and OTP Home Solutions Ltd. He was a member of OTP Bank’s Supervisory Board from 2004 to 14 April 2016. He has been a member of OTP Bank's Board of Directors since 15 April 2016. As of 31 December 2022 he held 114,759 ordinary OTP shares (while the total number of OTP shares held by him directly and indirectly was 119,059). László Wolf member of the BoD Deputy CEO Commercial Banking Division He graduated from the Karl Marx University of Economic Sciences in 1983. After graduation, he worked at the Bank Relations Department of the National Bank of Hungary for 8 years, and then he was head of Treasury at BNP-KH-Dresdner Bank between 1991 and 1993. From April 1993 he was managing director of OTP Bank’s Treasury Directorate, and since 1994 he has been the head of Commercial Banking Division as Deputy CEO. Since 2003 he has been a member of DSK Bank’s Supervisory Board. He has been Chairman of the Board of Directors of OTP banka Srbija since 10 December 2010. He has been a member of OTP Bank's Board of Directors since 15 April 2016. As of 31 December 2022 he held 535,347 ordinary OTP shares. Non-executive members: Tamás György Erdei Deputy Chairman of the BoD BSc Business Administration He graduated in 1978 with a degree from the College of Finance and Accounting. He began his professional career at OTP, in a variety of administrative roles (his last position was branch manager), before going on to work at the Ministry of Finance in the area of bank supervision. From 1983 he was employed by the Hungarian Foreign Trade Bank (today MKB), where he gradually worked his way up through the ranks. In 1985 he became managing director, in 1990 he was appointed Deputy CEO, then in 1994 he became CEO, and from 1997 until the end of March 2012 he was Chairman & CEO. Between 1997 and 2008, and between 2009 and 2011, he was the elected president of the Hungarian Banking Association. He is the Chairman of the Supervisory Board of the International Children’s Safety Service. He has been a member of OTP Bank’s Board of Directors since 27 April 2012. He has been the Chairman of OTP Bank's Risk Assumption and Risk Management Committee, and he was a member of the Nomination Committee between 2014 and 2020. He has been the Deputy Chairman of the Board of Directors of OTP Bank Plc. since April 2019 and the Chairman of the Work-out Committee since October 2019. He has been Chairman of the Board of Directors at OTP Factoring Ltd. since December 2019. As of 31 December 2022 he held 43,085 ordinary OTP shares. INTEGRATED ANNUAL REPORT 2022 552 OTP BANK OTHER INFORMATIONS Gabriella Balogh member of the BoD MSc Economics, specialization in marketing She graduated as organizing chemical engineer from the University of Veszprém in 1993 and as marketing economist from the University of Economics, Budapest in 1997. She worked as a marketing associate between 1993 and 1998, as director of the Marketing Department from 1998 to 2005 and as managing director of the Marketing and Sales Directorate between 2005 and 2008 at OTP Bank Plc. She has been managing director of GoodStep Consulting Kft. since 2008. She fulfilled group management tasks as a Board of Directors member at the Central European Media and Publishing Company between 2010 and 2017. She has been co-owner and Board of Directors member of Net Media Plc. since 2016. She is Presidium member and Chairwoman of the Marketing and Media Board of the Hungarian Football Association. She is the Chairwoman of the Supervisory Board of Művészetek Palotája Ltd. She has been a member of OTP Bank's Board of Directors since 16 April 2021. As of 31 December 2022 she held 8,193 ordinary OTP shares. Mihály Baumstark member of the BoD BSc Agricultural Business Administration, MSc Economics He graduated with a degree in agricultural business administration at Gödöllő University of Agriculture (1973), and went on to do a masters in economics at the Karl Marx University of Economic Science (1981). He was employed by the Ministry of Agriculture and Food Industry between 1978 and 1989. When he left the Ministry he was Deputy head of the Investment Policy Department. Then he was managing director of Hubertus Bt., and from 1999 to 2011 he was deputy CEO and then Chairman & CEO of Villányi Winery Ltd. (now Csányi Winery Ltd.). He is currently retired. He was a member of OTP Bank’s Supervisory Board from 1992 to 1999, and has been a non-executive member of OTP Bank’s Board of Directors since 1999. He has been Chairman of OTP Bank's Ethics Committee since 2010, as well as a member of its Remuneration Committee since 2011. He was the member of the Nomination Committee between 2014 and 2020. As of 31 December 2022 he held 53,600 ordinary OTP shares. Dr. István Gresa member of the BoD PhD Business Administration and Economics He graduated from the College of Finance and Accountancy in 1974 and received a degree in economics from the Karl Marx University of Economic Sciences in 1980. He earned a PhD from the University of Economic Sciences in 1983. He has worked in the banking sector since 1989. Between 1989 and 1993 he was branch manager of Budapest Bank’s Zalaegerszeg branch. From 1993 he was director of OTP Bank’s Zala County Directorate, and from 1998 he was the managing director of the Bank’s West Transdanubian Region. From 1 March 2006 until 14 April 2016 – when he retired – he was Deputy CEO of the Credit Approval and Risk Management Division. He was Chairman of the Board of Directors at OTP Factoring Ltd. between 2006 and 2017. He has been a member of OTP Bank’s Board of Directors since 27 April 2012. As of 31 December 2022 he held 182,858 ordinary OTP shares. INTEGRATED ANNUAL REPORT 2022 553 OTP BANK György Nagy member of the BoD Msc International Economics OTHER INFORMATIONS He graduated from the Department of International Foreign Economics of University of International Relations (Moscow) in 1989. He was a founding owner of Wallis Holding (founded in 1990) and he managed the Wallis Group as CEO until 2000. He founded Westbay Holding Kft. in 2004, the company’s portfolio includes several successful investments. He has been the Chairman of the Hungarian Shooting Federation since 2012, Presidium member of the European Shooting Confederation (ESC) since 2013 and he was elected the Vice President of ESC in 2021. He has been a member of OTP Bank's Board of Directors since 16 April 2021. As of 31 December 2022 he held 34,800 OTP shares (while the total number of OTP shares held by him directly and indirectly was 1,118,955). Dr. Márton Gellért Vági member of the BoD General Secretary Hungarian Football Association He graduated in 1987 from the department of foreign economics at the Karl Marx University of Economic Science From 1987 to 2000 he was lecturer at University of Economic Science of Budapest (today Corvinus University of Budapest) and from 1994 onwards associate professor and head of department. He has a university doctorate and a PhD in economics. He has authored or co-authored more than 80 studies, essays and books. Between 2000 and 2006 he worked at the State Holding and Privatisation Co. (ÁPV Zrt.), as managing director, Deputy CEO and then CEO. Between 2006 and 2010 he was Chairman of the National Development Agency. In various periods between 2000 and 2010, he was the Chairman of the Board of Directors of Magyar Villamos Művek, Paks Nuclear Power Plant and the National Textbook Publishing House. Between 2002 and 2010, he was a member of the Board of Directors of Földhitel és Jelzálogbank Nyrt., and the Chairman of the Board of Directors for 4 years Since 2010 he has been general secretary of the Hungarian Football Association. He has been a member of UEFA’s HatTrick Financial Assistance Committee since 2011. He has been a member of FIFA’s Financial Committee since 2017. He was a member of OTP Bank’s Supervisory Board between 2011-2021.He was a member of OTP Bank’s Audit Committee between 2014-2021. He was a member of OTP Bank’s Nomination Committee between 2020-2021. He has been a member of OTP Bank's Board of Directors since 16 April 2021. As of 31 December 2022 he held 8,500 OTP shares. Dr. József Zoltán Vörös member of the BoD Professor emeritus, academician University of Pécs He earned a degree in economics from the Karl Marx University of Economic Sciences in 1974. In 1984 he earned a PhD in economics from the Hungarian Academy of Sciences, and a Doctor of Science degree in 1993. He has been a member of the Hungarian Academy of Sciences since 2013. INTEGRATED ANNUAL REPORT 2022 554 OTP BANK OTHER INFORMATIONS Between 1990 and 1993 he was the dean of the Faculty of Business and Economics, Janus Pannonius University (JPTE) in Pécs. In 1993 he attended a course in management for senior executives at Harvard University. From 1994 he was a professor at JPTE, from 2021 he has been professor emeritus. He was the senior Vice Rector of the University from 2004-2007, between 2007 and 2011 he was Chairman of the Economic Council of the University of Pécs. He has been a non-executive member of OTP Bank’s Board of Directors since 1992. He has been Chairman of OTP Bank's Remuneration Committee since 2009, and member of its Risk Assumption and Risk Management Committee since 2014. As of 31 December 2022 he held 186,714 ordinary OTP shares. Supervisory Board Supervisory Board members are elected by the General Meeting for a term of three years. Independent members: Tibor Tolnay Chairman of the SB He graduated from Budapest University of Technology as a qualified civil engineering in 1978, and in 1983 he obtained a degree in economic engineering. In 1993 he finished his studies as specialized economist at Budapest University of Economics. From 1989 to 1994, he was director of State Construction Company No. 21. From 1994 to 2015 he was Chairman & CEO of the already privatized Magyar Építő Joint Stock Company. He has been the managing director of Érték Ltd. since 1994. Since 2020 he has been the managing director of Fenyves Garden Ltd. From 2018 to 2021 he was President of the National Association of Entrepreneurs and Employers, since 2021 co-President. Since 1992 he has been a member of OTP Bank's Supervisory Board, and Chairman of the Supervisory Board since 1999. He was a member and Deputy Chairman of OTP Bank’s Audit Committee between 2007 and 2011, and has been again since 2014. He has been the Chairman of OTP Bank’s Nomination Committee since 2020. As of 31 December 2022 he held 54 ordinary OTP shares. Dr. József Gábor Horváth Deputy Chairman of the SB Lawyer He earned a degree in law from Eötvös Loránd University in Budapest in 1980. From 1983 he worked for the Hungarian State Development Bank He has been a lawyer since 1986, and since 1990 has run his own law firm, which specialises in corporate finance and corporate governance. He has been a member of the Supervisory Board of OTP Bank since 1995, and was a member of MOL Plc.’s Board of Directors between 1999 and 2014. He has been Deputy Chairman of OTP Bank's Supervisory Board since 2007. He was Chairman of OTP Bank's Audit Committee between 2007 and 2011, and has been again since 2014. He has been a member of OTP Bank’s Nomination Committee since 2020. He was a member of the Board of Directors of INA Industrija Nafte d.d. from 2014 to 2018. As of 31 December 2022 he held no ordinary OTP shares. INTEGRATED ANNUAL REPORT 2022 555 OTP BANK OTHER INFORMATIONS Dr. Tamás Gudra Member of the SB BSc Business Administration, Lawyer He graduated as business administrator in 1993 from the College of Commerce and Catering. He is a Hungarian chartered auditor since 1997. He also obtained a university degree in 2010 as a lawyer at the Faculty of Law of Janus Pannonius University in Pécs. He worked as an auditor from 1993 to 2001 at Deloitte & Touche. Between 2001 and 2003 he was an accounting expert of subsidiaries at the Accounting and Tax Directorate of the Hungarian Oil and Gas Public Limited Company (MOL Rt). Then he was managing director at the Auditor, Financial and Accounting Directorate of the National Privatization and Asset Manager Plc. (ÁPV Zrt.) between 2003 and 2007 and became the director of Controlling Directorate at the Hungarian National Asset Manager Plc. (MNV Zrt.) from 2008 to 2010. Following these assignments, he worked as the CFO of the Hungarian Football Association from 2011 until June of 2020. As of July 2020, he became the group-level CFO of Bonafarm Zrt. He was a member of the Supervisory Board of OTP Lakástakarék Zrt. between 2012 and 2021 and he is Chairman of the Hungarian Paralympic Committee’s Supervisory Board since 2016. Since 2021 he has been property inspector of Hungarian University of Agriculture and Life Sciences, member of the Executive Committee of Pick Szeged Zrt., SOLE-Mizo Zrt and MCS Vágóhíd Zrt. He has been a member of the Supervisory Board and Audit Committee of OTP Bank since 16 April 2021. As of 31 December 2022 he held no ordinary OTP shares. Olivier Péqueux Member of the SB Groupama International SA He graduated from Institute of Actuaries of France, Polytechnique School and ENSAE Paris Tech. Started to work in 1998 as an insurance commissioner for the French Insurance Supervisory Authority. In 2003, he joined the French Ministry of Finance to take part in the pension law reform and the setup of a pension fund for French civil servants. Then he became technical adviser to the French Minister of health and pensions. In 2005 he joined Groupama Group, first in charge of the actuary and accounting department of Gan Patrimoine, a life insurance company, and then in 2007 as Chief Financial Officer of Groupama Paris Val de Loire. He moved to China in March 2011 as Deputy General Manager of Groupama China, in charge of finance, actuary and investments in the joint venture between AVIC and Groupama. From 2015 to 2017, he was the General Manager of Groupama AVIC. He has been the Chief International Officer of Groupama Assurances Mutuelles since March 2018. He has been Groupama Assurances Mutuelles Deputy CEO since September 2020. He has been a member of OTP Bank’s Supervisory Board, and Audit Committee since 2018. As of 31 December 2022 he held no ordinary OTP shares. Employee delegates: Klára Bella Member of the SB Director Large Corporate Department She graduated from the College of Finance and Accountancy and later obtained a degree from the Budapest University of Economic Sciences. From 1992 to 1994 she worked as a clerk at the Fertőszentmiklós branch of OTP Bank. INTEGRATED ANNUAL REPORT 2022 556 OTP BANK OTHER INFORMATIONS From 1994 to 1995 she was a lending consultant at Polgári Bank. From 1995 to 1996 she worked as a risk manager at the Central Branch of OTP Bank. From 1996 to 1997 she was authorizer in the Credit Approval and Risk Management Division. From 1997 to 2010 she was Deputy Managing Director at the Central Branch. From 2010 to 2016 she was Director at the Central Branch. Between 2017 and 2020, she was Director of the Corporate Directorate. Since 1 July 2020, she has been the Director of the Large Corporate Department of the Specialised Finance Directorate. She has been a member of OTP Bank’s Supervisory Board, and representative of the Bank’s employees since 12 April 2019. As of 31 December 2022 she held 408 ordinary OTP shares. András Michnai Member of the SB Managing Director He graduated in 1981 from the College of Finance and Accounting with a degree in business administration. He has been an employee of the Bank since 1974, and until 1981 held a variety of posts in the branch network. Following this he held a management position in the central network coordination department before returning to work in the branch network. From 1994, as deputy managing director, he participated in the central coordination of the branch network. Between 2005 and 2014 he was the managing director of the Bank’s Compliance Department. He further expanded his professional skills, obtaining a Master’s degree at the Budapest Business School, and is a registered tax advisor. He has been a member of OTP Bank’s Supervisory Board, and representative of the Bank’s employees, since 2008. He has been Secretary of OTP Bank’s Employees’ Trade Union since December 2011. As of 31 December 2022 he held 100 ordinary OTP shares. Members of OTP Bank Plc.’s senior management: Dr. Sándor Csányi Chairman & CEO László Bencsik Chief Strategic and Financial Officer, Deputy CEO Strategy and Finance Division In 1996, he graduated from the Faculty of Business Administration at the Budapest University of Economic Sciences, and in 1999 he obtained a Master’s in Business Administration (MBA) from INSEAD Business School in France. Between 1996 and 2000 he worked as a consultant at Andersen Consulting (now Accenture). From 2000 to 2003 he was a project manager at consulting firm McKinsey & Company. He joined OTP Bank in 2003, when he became managing director of the Bank Operations Management Directorate, and the manager with overall responsibility for controlling and planning. He has been deputy CEO of OTP Bank, and head of the Strategy and Finance Division, since August 2009. Since 13 March 2012 he has been Chairman of the Supervisory Board of DSK Bank. As of 31 December 2022 he held 12,744 ordinary OTP shares. INTEGRATED ANNUAL REPORT 2022 557 OTP BANK OTHER INFORMATIONS Péter Csányi Member of the Board of Directors, Deputy CEO Digital Division György Kiss-Haypál Deputy CEO Credit Approval and Risk Management Division He is a qualified economist. He graduated from the Budapest University of Economic Sciences in 1996. He started his career as a project finance analyst for Budapest Bank Plc., and by 2007 he had been appointed head of the bank’s risk management department. Between 2002 and 2006 he also worked in Ireland as corporate credit risk portfolio manager for GE Consumer Finance Europe, and in Austria as GE Money Bank’s consumer loans portfolio manager. Between 2008 and 2015 he was member of the Board of Directors of Budapest Bank. From 2015 he was deputy head of the Credit Approval and Risk Management Division of OTP Bank Plc., and was then appointed acting head of the Division. Since 3 May 2017, he has been deputy CEO of the Credit Approval and Risk Management Division. As of 31 December 2022 he held 10,905 ordinary OTP shares. Antal György Kovács Member of the Board of Directors, Deputy CEO Retail Division László Wolf Member of the Board of Directors, Deputy CEO Commercial Banking Division INTEGRATED ANNUAL REPORT 2022 558 OTP BANK OTHER INFORMATIONS SUSTAINABILITY REPORTING ANNEX Employee data GRI 2-7 Employees under permanent versus temporary contracts by region, 31.12.2022 Hungary Bulgaria Croatia Serbia Slovenia Romania Ukraine Russia Montenegro Albania Moldova Malta OTP Group Permanent % 96.5% 95.6% 92.5% 95.0% 98.3% 95.7% 97.1% 97.2% 90.2% 94.4% 84.2% 80.0% 95.8% GRI 2-7 Full and part time employees by regionally, 31.12.2022 Hungary Bulgaria Croatia Serbia Slovenia Romania Ukraine Russia Montenegro Albania Moldova Malta OTP Group Full time employees % 91.9% 93.9% 98.5% 99.4% 96.4% 97.6% 96.6% 91.0% 99.2% 100.0% 99.2% 60.0% 94.0% persons 13,001 5,309 2,363 2,667 909 1,788 2,373 7,036 450 473 756 4 37,129 persons 12,380 5,217 2,516 2,790 892 1,824 2,362 6,587 495 501 891 3 36,458 GRI 401-1 Employees left, employees hired, 2022 OTP Bank Hungary Bulgaria Croatia Serbia Slovenia Romania Ukraine Russia Montenegro Albania Moldova Men Women Under 30 years Between 30–49 years Over 50 years Total – OTP Group Per country – OTP Group By gender – OTP Group By age group – OTP Group Temporary % 3.5% 4.4% 7.5% 5.0% 1.7% 4.3% 2.9% 2.8% 9.8% 5.6% 15.8% 20.0% 4.2% Part-time employees % 8.1% 6.1% 1.5% 0.6% 3.6% 2.4% 3.4% 9.0% 0.8% 0.0% 0.8% 40.0% 6.0% Left 1,281 1,805 1,120 228 518 89 367 1,018 4,962 64 108 166 2,462 7,985 4,639 4,687 1,121 10,447 persons 477 246 192 127 16 80 72 202 49 28 142 1 1,646 persons 1,098 338 39 18 33 44 83 651 4 0 7 2 2,317 New hires 1,707 2,309 899 231 433 111 454 396 2,989 33 140 170 2,407 5,761 4,221 3,431 516 8,168 INTEGRATED ANNUAL REPORT 2022 559 OTP BANK OTHER INFORMATIONS GRI 205-2 Distribution of employees by position, number of employees, 31.12.2022 Senior manager Middle manager Employees OTP Bank OTP Group 6 1,361 9,149 82 3,638 35,055 GRI 402-1 Minimum notice periods regarding significant operational changes that could substantially affect employees Minimum notice periods Does the Collective Bargaining Agreement set out a minimum period of notice and provisions for consultation and negotiation? OTP Bank and Hungarian subsidiaries with collective bargaining agreements Additional Hungarian subsidiaries DSK Bank OTP Croatia OTP Bank Serbia SKB Bank OTP Bank Romania OTP Bank Ukraine OTP Bank Russia CKB OTP Bank Albania OTP Bank Moldova 15 days 15 days 45 days 8 days 8 days 30 days 20 working days 60 days 30 days 8 days 1-3 months 5 working days yes no yes yes yes yes yes no no no no no GRI 404-2 Programmes provided to upgrade employee skills and to facilitate continued employability and the management of career endings in 2022 In-house training courses Support for external trainings or education programmes Leave of absence for studying, with job guaranteed to be reserved Continued training for those who intend to keep on working after retirement Severance pay If the organisation provides severance pay, does it take into account the employee’s age If the organisation provides severance pay, does it take into account the number of the employee’s years of service Jobseeker assistance for employees made redundant Assistance during the transition to life without employment Weighted average by employee headcount. Typically not available/Typically no: available at less than 50% of the members of the Group. Partly available: available at 51–70% of the members of the Group. Typically available: available at 71–99% of the members of the Group. OTP Bank Available Available Available OTP Group Typically available Typically available Typically available Not available Typically not available Available Typically available Yes Yes Partly yes Typically yes Not available Not available Typically not available Typically not available INTEGRATED ANNUAL REPORT 2022 560 OTP BANK OTHER INFORMATIONS GRI 207-4 Country by country taxation Revenue from sales to third parties Country Revenue from transactions within the Group and between countries Profit before tax (+) profit/(-) loss Tangible assets and inventories Income tax on a cash flow basis 1. 2. 3. 4. 5. Albania Bulgaria Cyprus Netherla nds Croatia Hungary Malta Moldova Montene gro Russia Romania Serbia Slovakia Slovenia Ukraine Total 24,989 244,023 0 0 119,225 1,567,482 3 37,454 36,036 256,819 129,548 137,435 0 53,800 148,438 2,755,250 235 35,694 905 0 9,212 69,966 24,457 0 467 4,835 4,146 3,869 0 7,139 771 161,696 HUF million 6,283 139,674 883 -55 50,693 95,321 5,822 9,445 11,810 49,010 7,820 42,888 -15 29,124 -13,396 435,310 11,152 67,022 0 0 25,950 276,720 19 6,432 7,818 14,524 12,439 37108 0 10,455 7,205 476,843 Income tax liabilities recognised against profit after tax (IAS12) excluding deferred tax 6. Statutor y corporat e tax rate Effective tax rate excludin g deferred tax 7. 8=6/3 % 1,761 8,655 0 0 5,529 30,800 866 754 808 14,479 514 1,412 0 5,467 3,364 74,411 2,075 11,711 147 0 12,519 26,341 361 1,207 15.0% 10.0% 12.5% 25.8% 18.0% 9.0% 35.0% 12.0% 33.0% 8.4% 16.6% not applicable 24.7% 27.6% 6.2% 12.8% 2,152 15.0% 18.2% 20,963 606 5,335 0 5,536 2,584 91,537 20.0% 16.0% 15.0% 21.0% 19.0% 18.0% 42.8% 7.7% 12.4% not applicable 19.0% -19.3% - - The data for Russia also include data for Velvin Ventures Ltd., a company incorporated in Belize, on account of its tax residency in Russia. The effective tax rate is the quotient of the actual income tax expense for the current year, as recognised in the profit and loss statement as per IAS 12, and the profit before tax, including the amount of dividends received. The amount of tax liability taken into account in the calculation of the effective tax rate does not include the amount of deferred taxes. The effective tax rate in the various countries may differ from the corporate tax rate under local tax laws. The deviation can typically be traced back to the follo wing: - The preparation of consolidated accounts under IFRS requires some adjustments to the data of individual statements prepared in accordance with local accounting standards in order to comply with IFRS. The effective tax rate calculated using these adjusted figures may deviate from the tax rate under local tax laws. - Revenue that does not create a tax base (e.g. dividend) or expenses that are not permanently deductible for tax purposes; - Withholding taxes levied abroad and other taxes imposed in addition to corporate tax that are considered income taxes (e.g. Croatian bank tax, Hungarian local business tax and innovation contribution); - Loss used in the tax year. INTEGRATED ANNUAL REPORT 2022 561 OTP BANK GRI CONTENT INDEX OTHER INFORMATIONS The GRI content index contains technical information on sustainability reporting and the use of the GRI Standards, and shows the disclosures/indicators on which, and where, the OTP Group reports. GRI 2-2, 2-3 Characteristics of the Sustainability Reporting Declaration on use GRI 1 used Applicable GRI Sector Standard(s) Entities covered Date of publication Reporting cycle Contact info: External assurance Presentation of data – breakdown OTP Bank Plc. reported on the period between 01.01.2022 and 31.12.2022 in accordance with the GRI Standards. GRI 1: Basic 2021 - OTP Group: OTP Bank Plc. and subsidiaries consolidated under the IFRS @Annual report, supplementary data 28 April 2023 annual csr@otpbank.hu independent (third party) assurance; assurance provider: Ernst&Young Ltd. • • • essentially OTP Bank and OTP Group; breakdown by country, where required by the GRI; financial data – OTP Core1 and OTP Group. Presentation of data – time horizon preferably, 5 years in retrospect Indicator number Indicator description Where to find it Note / Reasons for omission GRI 2: General disclosures 2021 The organisation and its reporting practices 2-1 Organisational details 2-2 Entities included in the organisation’s sustainability reporting 2-3 2-4 Reporting period, frequency and contact point Restatements of information 2-5 External assurance Activities and employees 2-6 Activities, value chain and other business relationships 2-7 2-8 Employees Workers who are not employees Management 2-9 Governance structure and composition OTP Group is present in 15 countries, of which it has banks in 11 (where it performs monetary intermediary activities), engaging in significant operations. We report in full on the companies covered, including all material topics, but not all material topics and indicators are relevant to all companies. Consolidation approach applied for the topic of GHG emissions: operational control. As regards acquisition the basic principle is that – unlike in the case of financial reporting – we report on a new member company when it has been a member of OTP Group for a full year. The 2022 sustainability disclosures did not therefore cover Alpha Bank Albania; OTP Ecosystem Kft., DSK Ventures EAD, OD Kft., Mendota Invest, Nepremicninska druzba, d.o.o. and ZA-Invest Delta Kft. were not, until the second half of 2022, covered by consolidation therefore they are not covered by the sustainability report either. DSK Operating lease EOOD, OTP eBIZ Kft. and DSK Mobile EAD ceased to be covered by financial consolidation during 2022 therefore they are still included in the sustainability disclosures. Information may be republished due to changes in data collection methodology or if corrections are needed for previously disclosed erroneous information; this is noted at the relevant place within the text, showing the effects of re-publishing. The external assurance provider is independent of OTP Group. Interview was conducted with the head of the ESG Subcommittee during certification. In addition to providing financial services, four consolidated companies of the OTP Group are operating in the agricultural and food sector. No material change occurred in the operation, value chain or relevant business relationships of the Group relative to 2021. Data disclosed for the first time. pp. 561, website, GRI index pp. 175- 176, GRI index p. 562 pp. 156- 157 GRI Index GRI Index, pp. 576- 579 p. 26, p. 83, p. 86, p. 108, p. 124, GRI index, website pp. 134- 136, p. 559 p. 135, GRI index FTJ: 1.1- 1.4, p. 87 1 OTP Core is the business entity measuring the core activities of OTP Group Hungary. Its members in 2022: OTP Bank Plc, OTP Jelzálogbank Zrt, OTP Lakástakarék Zrt, OTP Faktoring Zrt, OTP Pénzügyi Pont Kft. and entities performing group financing activities; also included are OTP Bank Munkavállalói Résztulajdonosi Program Szervezet (OTP Bank’s Employee Stock Ownership Plan Organisation), OTP Kártyagyártó Kft, OTP Ingatlanüzemeltető Kft, MONICOMP Zrt, as well as OTP Ingatlanpont Ingatlanközvetítő Kft, OTP Mobil Szolgáltató Kft, OTP eBIZ Kft. and OTP Otthonmegoldások Kft. INTEGRATED ANNUAL REPORT 2022 562 OTP BANK OTHER INFORMATIONS Note / Reasons for omission The procedure of the nomination of the members of the Board of Directors and the Supervisory Board is disclosed by the Company in its Responsible Corporate Governance Report. Regarding the candidates, the Company observes MNB recommendation No. 1/2022 (I. 17.) and Act CCXXXVII of 2013 (Credit Institutions Act) concerning independence, diversity, professional competences and conflicts of interest alike. The EBA Guidelines underlying the MNB recommendation provides that when selecting members of the management body (i.e. nominating members), the collective suitability of the management body should also be ensured, for which members with as diverse professional expertise and experience as possible should be selected because owing to the broad range of expertise and experience (e.g. IT, AML, risk management, product development, compliance, HR, etc.), the requirement of the technical/professional diversity of management bodies is a quasi supervisory requirement. Collective assessment of the professional expertise, competences and experience is carried out on the basis of the methodology recommended by EBA. The Company also has a strategy for the promotion of gender diversity. Shareholders can make proposals for candidates in the framework stipulated by law. One member of the Supervisory Board is nominated by the Groupama group which has a larger than 5% share. One third of the Supervisory Board members are nominated by the Bank's works council from the Company's employees. The Chairman of the Supervisory Board is independent. The sustainability disclosure is approved by the Board of Directors as part of the business report. Code of Ethics: 3.3; Compliance policy abstract III.1.2 All employees must be familiar with the Conflict of Interest Policy. The Conflict of Interest Policy includes the conflict of interest rules on executive officers as well, providing inter alia that the members of the Board of Directors and the Supervisory Board must abstain from voting on any subject in relation to which they do or may have a conflict of interest or in the case of which their objectivity or their capability of adequately fulfilling their obligations towards the Bank may be compromised. The members of the boards regularly submit declarations regarding their interests in related parties, along with declarations on conflicts of interests. Records are kept of their interests as required by law to avoid conflicts of interests. Cases of cross share ownership with suppliers and other stakeholders are not reported by the Banking Group. The governing bodies are informed about the implementation of the ESG strategy. In 2022 the ESG training material of the governing body was prepared; comprehensive training will take place in 2023. Preparation of reporting the indicator was started in 2022 but it was not finished by the end of the year. Collecting and aggregating adequate data at group level technically takes longer. Also, because of the very large differences between the average wage levels in the countries of the Banking Group, we are reflecting on the most relevant way to present this. The indicator will be presented in 2025 at the latest. Code of Ethics: A standard Code of Ethics is in force at all members of OTP Group; any deviations are due to compliance with local laws. The Code is available on the websites of OTP Bank and the subsidiaries. The Code recognises and respects international human rights. Indicator number 2-10 Indicator description Nomination and selection of the highest governance body Where to find it FTJ: 1.1.2, 1.2.2, 1.13, GRI Index 2-11 Chair of the highest governance body 2-12 2-13 Role of the highest governance body in overseeing the management of impacts Delegation of responsibility for managing impacts 2-14 Role of the highest governance body in sustainability reporting 2-15 Conflicts of interest 2-16 2-17 2-18 2-19 Communication of critical concerns Collective knowledge of the highest governance body Evaluation of the performance of the highest governance body Remuneration policies 2-20 Process to determine remuneration GRI index, FTJ: 1.2 p. 87 pp. 87-90, p. 99, p. 120, p. 125, p. 127, p. 132, p. 154 p. 82, GRI index pp. 121- 122, GRI index, Code of Ethics, Compliance policy, FTJ: 1.2.2, 1.2.1 (p. 3)., p. 20, p. 73, pp. 314- 315, pp. 493-495 p. 87 GRI Index FTJ: 1.12 p. 87, p. 141, website p. 141, website1, website2 2-21 Annual total compensation ratio GRI Index Strategies, guidelines, practices 2-22 2-23 Statement on sustainable development strategy Policy commitments 2-24 2-25 2-26 2-27 Embedding policy commitments Processes to remediate negative impacts Mechanisms for seeking advice and raising concerns Compliance with laws and regulations 2-28 Membership in associations p. 4 p. 88, p. 122, website1, website2, GRI index p. 122 p. 125, website p. 122 pp. 124- 125 website INTEGRATED ANNUAL REPORT 2022 563 OTP BANK Indicator number Indicator description Involvement of stakeholders 2-29 Approach to stakeholder engagement 2-30 Collective bargaining agreements Where to find it p. 113, p. 139, p. 145, website p. 138, GRI index GRI 3: Material topics 2021 3-1 3-2 3-3 Process to determine material topics pp. 80-81 List of material topics p. 82 Management of material topics GRI Index OTHER INFORMATIONS Note / Reasons for omission @Stakeholder relations The working conditions and the terms and conditions of employment of employees not covered by collective agreements at the members of the Banking Group are typically not determined on the basis of the collective agreement of the member company or other organisation. The descriptions of the material topics are shown in italics in the introduction of chapter 2-7. If the description of any subparagraph is missing in relation to the given topic, it means that the Banking Group has no relevant practice. Our general principle is that we (also) use the topic specific indicators of the given topic as a method of evaluation of the efficiency of the actions taken; we use the indicator's expected data as the result. With other assessment methods, the presentation of the results always includes a clear reference to the method applied. List of material topics Social impacts and indirect economic impacts of lending (ST1) 3-3 Management of material topics 203-2 Significant indirect economic impacts FS6 FN-CB- 410a.1. Percentage of the portfolio for business lines by specific region, size (e.g. micro/SME/ large) and by sector. Commercial and industrial credit exposure, by industry Indirect economic impacts of investments (ST2) p. 78, p. 91, p. 101, p. 104, p. 113 p. 91, p. 98, p, 102, p. 105, p. 106, website pp. 108- 109, GRI index pp. 108- 109, GRI index 3-3 Management of material topics p. 91, p. 98 203-2 Significant indirect economic impacts Impact on livelihoods and income levels (ST3) 3-3 Management of material topics 2-21 Annual total compensation ratio Tax payment (GRI 207 2019) 3-3 Management of material topics 207-1 Approach to tax 207-2 Tax governance, control, and risk management 207-3 Stakeholder engagement and management of concerns related to tax 207-4 Country-by-country reporting Contribution to economic stability (ST4) 3-3 Management of material topics 201-4 Financial assistance received from government p. 91, p. 98, p. 102, p. 105, p. 106, GRI index, website p. 79, p. 133, p. 141 GRI Index p. 78, p. 120, p. 133 p. 78, p. 132, GRI Index p. 132, pp. 177-199, GRI Index, website, p. 80, p. 132, website p. 134, p. 561 p. 26, p. 78, website p. 20, p. 76, p. 127 OTP Group does not employ a generic approach or objectives regarding indirect economic impacts of lending but treats individual impacts on the basis of a strategic approach. In relation to indirect economic impacts as well, we always act in accordance with the principle of ethical business behaviour. The report is not comprehensive as regards risk ratings (FS6 2.4). We present assets by sector. (Partial compliance.) OTP Group does not employ a generic approach or objectives regarding indirect economic impacts of investments but treats individual impacts on the basis of a strategic approach. In relation to indirect economic impacts as well, we always act in accordance with the principle of ethical business behaviour. Preparation of reporting the indicator was started in 2022 but it was not finished by the end of the year. Collecting and aggregating adequate data at group level technically takes longer. Also, because of the very large differences between the average wage levels in the countries of the Banking Group, we are reflecting on the most relevant way to present this. The indicator will be presented in 2025 at the latest. In accordance with the principle of equal tax treatment, OTP Group spares no effort to ensure maximum compliance with all relevant statutory regulations on tax liabilities, in view of the purposes of taxes and contributions. The information on the disclosed taxes as part of the consolidated financial statements was audited. The disclosure of the indicators 207-1, 207-2, 207-3 and 207-4 are audited as part of the sustainability disclosures. INTEGRATED ANNUAL REPORT 2022 564 OTP BANK Indicator number Indicator description Where to find it Note / Reasons for omission OTHER INFORMATIONS EBA stress test result own indicator own indicator Environmental impact and GHG emission of lending (ST5) Tier 1 rate GRI Index p. 29, p. 40 3-3 Management of material topics 305-3 Other indirect (Scope 3) GHG emissions p. 78, p. 80, p. 85, p. 154 website p. 100, GRI index 305-4 GHG emissions intensity GRI Index Not in 2022. The indicator is applied only to the Scope 3 emissions of lending. Not reported for the time being; it will be disclosed first in 2024 after improvement of calculation accuracy. Improvement in calculation accuracy will be enabled by an increase in the range of publicly reported data and an improvement in their quality. The indicator is applied only to the Scope 3 emissions of lending. Not reported regarding Scope 3 for the time being; it will be disclosed first in 2024 after improvement of calculation accuracy. Improvement in calculation accuracy will be enabled by an increase in the range of publicly reported data and an improvement in their quality. The indicator is applied only to the Scope 3 emissions of lending. Not reported for Scope 3 for the time being, reporting is expected to be started in 2026 in accordance with the decarbonisation strategy. 305-5 Reduction of GHG emissions 201-2 FN-MF- 450a.3. FN-CB- 410a.2. Financial implications and other risks and opportunities due to climate change Description of how climate change and other environmental risks are incorporated into mortgage origination and underwriting climate change Description of approach to incorporation of environmental, social, and governance (ESG) factors in credit analysis Green loan products (ST6) 3-3 Management of material topics p. 100, GRI Index pp. 92-93, pp. 98-100 p. 99 Partially reported. p. 99 Partially reported. own indicator Environmental impact and GHG emission of investment products (ST7) Disclosure according to the Taxonomy Regulation p. 78, p. 80, p. 85, p. 93 pp. 93-94 3-3 Management of material topics FN-IB- 410a.3. Description of approach to incorporation of environmental, social, and governance (ESG) factors in investment banking and brokerage activities Green investment products (ST8) 3-3 Management of material topics own indicator GHG emissions of operation (GRI 305 2016) Proportion of products according to Articles 8 and 9 of the SFDR 3-3 Management of material topics 302-1 305-1 305-2 Energy consumption within the organisation Direct (Scope 1) GHG emissions Energy indirect (Scope 2) GHG emissions Partially reported. Implementation and disclosure are determined by statutory requirements, because they also require the introduction of a number of new practices. The practices relating to the criteria (items 2-7) required by the indicator are improving continuously but they have not been fully developed, therefore their presentation is expected to start in a few years. p. 80, p. 91, p. 98 p. 98, GRI index p. 80, p. 91, p. 98 p. 99 p. 80, p. 85, p. 154 website p. 156 p. 157 We do not apply a base year. p. 157 We do not apply a base year. Equal opportunity in accessing financial services (ST9) 3-3 Management of material topics own indicator FS13 own indicator Number of branches by country Access points in low populated or economically disadvantaged areas by type Accessibility for the disabled p. 78, p. 110, p. 114, p. 117, p. 67 pp. 116- 117 pp. 117- 119 INTEGRATED ANNUAL REPORT 2022 565 OTHER INFORMATIONS Note / Reasons for omission In 2022 there was no non-compliance with voluntarily accepted codes regarding information provision on, and labelling of, products and services. In 2022 there was no non-compliance with voluntarily accepted codes regarding marketing communications. Reporting on the number of persons entitled to parental leave can be started from 2024 due to the harmonisation of definitions and the implementation of data collection. In relation to correct retention rate the data supply is not sufficiently correct, therefore this is not stated here, we are working on its development. Our legally compliant occupational health and safety risk assessment did not identify threats that may pose a risk of serious accidents. OTP Group has no comprehensive policy for giving preference to local residents in respect of employees and senior management. Significant locations of operations: OTP Bank and foreign subsidiaries. Data on ethnic background is not listed owing to statutory regulations. The disclosure of data on total remuneration can be implemented at Group level from 2025, because there is no single registry system for this at present Partially reported OTP BANK Indicator number Indicator description Financial welfare (ST10) 3-3 Management of material topics 417-2 417-3 Incidents of non-compliance concerning product and service information and labelling Incidents of non-compliance concerning marketing communications Number of complaints related to product structure transparency Percentage of overdue loans over 90 days in the retail segment own indicator own indicator Prevention of money laundering (ST11) 3-3 Management of material topics own indicator Responsible employment (GRI 401 2016, 404 2016) Number of reports related to money laundering 3-3 Management of material topics 401-1 401-3 New employee hires and employee turnover Parental leave 402-1 404-1 404-2 404-3 403-9 Minimum notice periods regarding operational changes Average hours of training per year per employee Programmes for upgrading employee skills and transition assistance programs Percentage of employees receiving regular performance and career development reviews Work-related injuries Where to find it pp. 78-79, p. 110, p. 113 p. 125 p. 125 p. 126 p. 113 p. 131 p. 132 p. 139, p. 142, website pp. 134- 136, p. 559 p. 144, GRI Index p. 138, p. 560 p. 142 p. 142, p. 560 p. 140 pp. 145- 146 p. 144 p. 139 Programmes to help with stress management Employee engagement own indicator own indicator Equality of opportunities for employees (GRI 405 2016) 3-3 Management of material topics 202-2 401-2 405-1 405-2 Proportion of senior management hired from the local community Benefits provided to full-time employees that are not provided to temporary or part-time employees Diversity of governance bodies and employees Ratio of basic salary and remuneration of women to men p. 79, p. 133, p. 137, website, GRI index p. 138, GRI index p. 141 p. 137, GRI Index p. 141, GRI index Strengthening of financial awareness in vulnerable groups (ST12) 3-3 Management of material topics FN-CB- 240a.4. own indicator own indicator Number of participants in financial literacy initiatives for unbanked, underbanked, or underserved customers Education for socially disadvantaged children Financial literacy for people in disadvantaged areas p. 79, p. 147 p. 148, p. 150 pp. 147- 150 pp. 147- 150 Customer data and information security (GRI 418 2016) 3-3 Management of material topics p. 120, p. 128, website INTEGRATED ANNUAL REPORT 2022 566 OTP BANK OTHER INFORMATIONS Indicator description Indicator number 418-1 FN-CF- 230a.2. Substantiated complaints concerning breaches of customer privacy and losses of customer data Card-related fraud losses from (1) card- not-present fraud and (2) card-present and other fraud Ratio of bank card fraud to turnover own indicator own indicator Anti-corruption activities (GRI 205 2016) Amount of prevented bank card fraud 3-3 Management of material topics 205-1 205-2 Operations assessed for risk related to corruption Communication and training about anti- corruption policies and procedures 205-3 415-1 Confirmed incidents of corruption and actions taken Political contributions Compliance awareness (ST13) 3-3 Management of material topics 206-1 2-27 Legal actions for anti-competitive behaviour, anti-trust, and monopoly practices Compliance with laws and regulations Financing of high social risk sectors (ST14) 3-3 Management of material topics Exclusion and restrictive policies own indicator Non-discrimination (GRI 406 2016) 3-3 Management of material topics 406-1 410-1 Incidents of discrimination and corrective actions taken Security personnel trained in human rights policies or procedures Note / Reasons for omission Where to find it p. 128 p. 129 Partially reported p. 129 p. 129, GRI index p. 123, website, Code of Ethics, GRI index p. 123 pp. 123- 124, p. 135, p. 137, p. 560, GRI Index p. 123 Reported only for OTP Bank. OTP Group is committed to reporting on political contributions. The Anti-Corruption Policy is available on the websites of member companies. Each year the members of the governing bodies sign off on the Code of Ethics, i.e. they were fully – 100% – informed. They do not receive training. All employees receive annual training and information as a part of compliance training. We consider commissioned agents and suppliers as our business partners; all partners currently contracted to us were informed about the Code of Ethics at the time of contracting, which in not all cases took place in 2022. GRI Index OTP Group does not sponsor such persons or organisations. p. 121, website, Code of Ethics pp. 124- 125 pp. 124- 125 p. 91, p. 100 p. 100 p. 122, p. 133, p. 138, website1, website2 p. 122 p. 122, website INTEGRATED ANNUAL REPORT 2022 567 OTP BANK TCFD indicators Indicator description OTHER INFORMATIONS Chapters2 Comment I. Management Governance of the organisation in relation to climate risks and opportunities a, The governing body’s oversight in relation to climate-related risks and opportunities 1, 2.4 b, Management’s role in assessing and managing climate related risks and opportunities. II. Strategy The actual and potential impact of climate-related risks and opportunities on the organisation’s businesses, strategy, and financial planning where such information is material a, The climate-related risks and opportunities the organisation has identified over the short, medium, and long term. b, The impact of climate-related risks and opportunities on the organisation’s businesses, strategy, and financial planning. 2.2, 2.3, 2.4 2.2, 2.3, 2.4 1. Utilisation of the opportunities relating to climate is targeted by green financing, which is a dominant element of the ESG strategy. In the course of the risk assessment activities presented here we also take account of transition (actual and expected, regulatory, technological, market and reputation) risks and the (acute and chronic) physical risks alike. c, The resilience of the organisation’s strategy, taking into consideration different climate related scenarios, including a 2°C or lower scenario. III. Risk Management The way of the identification, assessment and management of climate risks a, The organisation’s processes for identifying and assessing climate related risks. b, The organisation’s processes for managing climate related risks. 2.4 2.3, 2.4 2.3, 2.4 c, How processes for identifying, assessing, and managing climate related risks are integrated into the organisation’s overall risk management. IV. Metrics and objectives: The metrics and objectives used in the assessment and management of the relevant climate risks where such details are relevant. 2.4 a, The metrics used by the organisation to assess climate related risks and opportunities in line with its strategy and risk management process. b, Scope 1, Scope 2, and, if appropriate, Scope 3 greenhouse gas (GHG) emissions, and the related risks. c, The targets used by the organisation to manage climate related risks and opportunities and performance against targets Sustainability approach 2.2, 2.3, 2.4 2.2, 2.3, 2.4, 7. Sustainability approach 2.2, 6. The metrics and objectives are enhanced and they grow more and more accurate continuously. 2 The chapters are the chapters of Sustainability Activities of the OTP Group in 2022 and Environmental Policy and Environmental Protection Measures (pp. 77- 161). INTEGRATED ANNUAL REPORT 2022 568 OTP BANK OTHER INFORMATIONS UNEP FI PRINCIPLES FOR RESPONSIBLE BANKING REPORT Principle 1: Alignment We will align our business strategy to be consistent with and contribute to individuals’ needs and society’s goals, as expressed in the Sustainable Development Goals, the Paris Climate Agreement and relevant national and regional frameworks. Business model Describe (high-level) your bank’s business model, including the main customer segments served, types of products and services provided, the main sectors and types of activities across the main geographies in which your bank operates or provides products and services. Please also quantify the information by disclosing e.g. the distribution of your bank’s portfolio (%) in terms of geographies, segments (i.e. by balance sheet and/or off-balance sheet) or by disclosing the number of customers and clients served. OTP Group is one of the fastest growing financial service provider group within the Central and Eastern European region. As at the end of 2022, our Banking Group served nearly 16 million customers in eleven countries through its 1455 branches, agent networks, 4697 ATMs, internet and electronic channels and with its more than 35 000 employees. https://www.otpgroup.in fo/about/history https://www.otpbank.hu /portal/en/AboutUs/OTP Group In Hungary, OTP Bank Plc. is one of the largest commercial bank when measured in terms of banking assets. OTP is a universal bank, providing a high level of service to the financial needs of retail, private banking, micro and small business, medium and large enterprise and municipal customers, both through our domestic subsidiaries and branches and via the continuously developing innovative digital services. The Bank offers a comprehensive range of other financial services, including fund management, leasing, and factoring. Serving agricultural companies and small and medium-sized enterprises is a priority for OTP Group. Besides Hungary, OTP Group currently operates in 10 countries of the region via its subsidiaries: in Albania (Banka OTP Albania SHA ), in Bulgaria (DSK Bank AD), in Croatia (OTP banka dioničko društvo), in Romania (OTP Bank Romania S.A.), in Serbia (OTP banka Srbija akcionarsko društvo Novi Sad), in Slovenia (SKB Banka d.d. Ljubljana), in Ukraine (Joint-Stock Company OTP Bank), in Moldova (OTP Bank S.A.), in Montenegro (Crnogorska Komercijalna Banka AD Podgorica) and in Russia (Joint Stock Company “OTP Bank”). The continued development and expansion of OTP Bank have significantly contributed to the successful and efficient operation of the Banking Group, which can provide high quality services for both the retail and the institutional clients. Strategy alignment Does your corporate strategy identify and reflect sustainability as strategic priority/ies for your bank? ☒ Yes ☐ No INTEGRATED ANNUAL REPORT 2022 569 OTP BANK OTHER INFORMATIONS Please describe how your bank has aligned and/or is planning to align its strategy to be consistent with the Sustainable Development Goals (SDGs), the Paris Climate Agreement, and relevant national and regional frameworks. Does your bank also reference any of the following frameworks or sustainability regulatory reporting requirements in its strategic priorities or policies to implement these? ☐ UN Guiding Principles on Business and Human Rights ☒ International Labour Organization fundamental conventions ☐ UN Global Compact ☐ UN Declaration on the Rights of Indigenous Peoples ☐ Any applicable regulatory reporting requirements on environmental risk assessments, e.g. on climate risk - please specify which ones: --------------------- ☐ Any applicable regulatory reporting requirements on social risk assessments, e.g. on modern slavery - please specify which ones: ------------------------- ☐ None of the above OTP Group wants to play a regional leading role in financing a fair and gradual transition to a low-carbon economy and building sustainable future with its financing solutions. https://www.otpgrou p.info/static/sw/file/ OTPGroup_ESG_appr oach.pdf The Group’s responsibility for sustainable development starts with its business activities; we contribute to a financial infrastructure that is key to a well-functioning society by reducing risks and help achieve a more sustainable future by creating business opportunities. In addition to economic considerations, ethical, social and environmental risks are incorporated into our business decision-making, our business development and our operations. https://www.otpban k.hu/static/portal/sw /file/OTP_Csoport_ho zzajarulas_SDG.pdf OTP Group approaches ESG from three main perspectives: as a responsible service provider, as a responsible employer and as a responsible social player. In addition to business opportunities, the strategy includes the management of relevant risks as well as social and corporate governance objectives. OTP Group has a strong will for its activity to serve for sustainable growth and social improvement, we committed to doing it with transparency and in line with Paris Agreement. We align our sustainability strategy with the Sustainable Development Goals. In order to avoid negative environmental and social impacts and to leverage potential business benefits, OTP Group considers sustainability a high priority, which received significant external attention in. INTEGRATED ANNUAL REPORT 2022 570 OTP BANK OTHER INFORMATIONS Principle 2: Impact and Target Setting We will continuously increase our positive impacts while reducing the negative impacts on, and managing the risks to, people and environment resulting from our activities, products and services. To this end, we will set and publish targets where we can have the most significant impacts. 2.1 Impact Analysis (Key Step 1) Show that your bank has performed an impact analysis of its portfolio/s to identify its most significant impact areas and determine priority areas for target-setting. The impact analysis shall be updated regularly3 and fulfil the following requirements/elements (a-d)4: a) Scope: What is the scope of your bank’s impact analysis? Please describe which parts of the bank’s core business areas, products/services across the main geographies that the bank operates in (as described under 1.1) have been considered in the impact analysis. Please also describe which areas have not yet been included, and why. The Group has conducted an analysis to identify the positive and negative impacts of company activities and to identify the areas with the most significant impacts, also considering the context in which it operates. IR page x We used the UNEP FI Portfolio Impact Analysis Tool to undertake an impact analysis of our portfolio. Due to the complexity of bank operations in different countries, the data collection required for the impact analysis is a major challenge. We are currently focusing on domestic market and the core business segments (retail and corporate). In Hungary Climate change, green transition, inclusive and healthy economies, affordable housing, resource efficiency and security, water quality are identified as high impact areas. To ensure consistency of proposed targets with stakeholder expectations, the Materiality matrix has been cross referenced. Green finance was rated as the most important issue for our stakeholders, while economic prosperity, issues for financial stakeholders. literacy and digitalization were ranked in the top three b) Portfolio composition: Has your bank considered the composition of its portfolio (in %) in the analysis? Please provide proportional composition of your portfolio globally and per geographical scope i) by sectors & industries5 for business, corporate and investment banking portfolios (i.e. sector exposure or industry breakdown in %), and/or ii) by products & services and by types of customers for consumer and retail banking portfolios. If your bank has taken another approach to determine the bank’s scale of exposure, please elaborate, to show how you have considered where the bank’s core business/major activities lie in terms of industries or sectors. 3 That means that where the initial impact analysis has been carried out in a previous period, the information should be updated accordingly, the scope expanded as well as the quality of the impact analysis improved over time. 4 Further guidance can be found in the Interactive Guidance on impact analysis and target setting. 5 ‘Key sectors’ relative to different impact areas, i.e. those sectors whose positive and negative impacts are particularly strong, are particularly relevant here. INTEGRATED ANNUAL REPORT 2022 571 OTP BANK OTHER INFORMATIONS Portfolio components by sector in Hungary Links and references Assets by sector, on-balance sheet exposure to own customers without leasing and consolidation, 31.12.2022. Agriculture, forestry, fishing Mining, quarrying Manufacturing Electricity, gas, steam and air conditioning supply Water management and remediation activities sewerage, supply; waste Construction Wholesale and retail trade; repair of motor vehicles and motorcycles Transportation and storage Accommodation and food service activities Information, communication Financial and insurance activities Real estate activities Professional, activities Administrative activities scientific and technical and support service Public compulsory social security administration and defence; Education Human health and social work activities Arts, entertainment and recreation Other services Activities of households as employers; undifferentiated goods for own use Not classified Total (HUF billions) Micro and small enterprises Medium and large enterprises 6% 0% 9% 0% 0% 18% 29% 6% 4% 3% 0% 6% 5% 4% 0% 1% 1% 1% 5% 0% 0% 5% 0% 10% 8% 0% 5% 14% 4% 3% 0% 9% 15% 5% 2% 3% 0% 0% 0% 7% n/a 9% 569.9 2772.0 OTP Group provides financial services to various sectors as described in 1. (Business model), some of which may present Environment and Social risks. Based on the impact analysis, areas of high importance and risk in the countries of the OTP group and also relevant from the perspective of the financial sector: - - - - - - Housing problems Resources efficiency, security Inclisuve&Healthy economies Education Justice&Equality Strong Insitiutions, peace&Stability Based on the Impact Analysis, the areas of climate change and financial inclusion are among the most significant ones. INTEGRATED ANNUAL REPORT 2022 572 OTP BANK OTHER INFORMATIONS c) Context: What are the main challenges and priorities related to sustainable development in the main countries/regions in which your bank and/or your clients operate?6 Please describe how these have been considered, including what stakeholders you have engaged to help inform this element of the impact analysis. This step aims to put your bank’s portfolio impacts into the context of society’s needs. Links and references https://www.oecd.org/env ironment/hungary-has- made-progress-on- greening-its-economy- and-now-needs-to-raise- its-ambitions.htm Hungary has made progress in greening its economy and cutting emissions, but it needs to speed up efforts to replace fossil fuels with renewable energy sources, improve energy efficiency in buildings and promote sustainable transport. Rising industrial activity and energy consumption are intensifying pressures on Hungary’s environment. Yet the economic rebound is an opportunity to invest more in energy efficiency and renewables, to accelerate the transition to green growth and a circular economy. Fossil fuels make up around two thirds of Hungary’s energy supply. Residential housing is Hungary’s biggest consumer of energy, with some 80% of buildings lacking modern, efficient heating systems. Introducing energy efficiency measures in new buildings could reduce related energy consumption by more than half. We conducted an impact analysis to identify the positive and negative impacts of company activities and to identify the areas with the most significant impacts, also considering the context in which it operates. The organised and effective management of the Group’s environmental impacts is one of the key issues that has emerged. Our ESG goals are identifying the risks related to climate and environmental change, evaluating their impact and gradually introducing metrics for measuring them, focusing first and foremost on identifying climate risks. In said context, OTP Bank has also launched a process of acquiring useful information for managing environmental risks and gradually integrating these factors into the Risk Management Framework. With regard to credit exposures, our objective is to follow an integrated approach to take account of climate risks at all relevant stages of the credit process, by gradually implementing tools that make it possible to collect information and incentivise lending in sectors with significant ESG performance and support the transition of companies in said sectors towards a more sustainable business model and, ultimately, a smaller environmental footprint. Based on these first 3 elements of an impact analysis, what positive and negative impact areas has your bank identified? Which (at least two) significant impact areas did you prioritize to pursue your target setting strategy (see 2.2)7? Please disclose. Based on the Impact Analysis, the areas of climate change and financial health& inclusion are among the most significant ones. Links and references d) For these (min. two prioritized impact areas): Performance measurement: Has your bank identified which sectors & industries as well as types of customers financed or invested in are causing the strongest actual positive or negative impacts? Please describe how you assessed the performance of these, using appropriate indicators related to significant impact areas that apply to your bank’s context. In determining priority areas for target-setting among its areas of most significant impact, you should consider the bank’s current performance levels, i.e. qualitative and/or quantitative indicators and/or proxies of the social, economic and environmental impacts resulting from the bank’s activities and provision of products and services. If you have identified climate and/or 6 Global priorities might alternatively be considered for banks with highly diversified and international portfolios. 7 To prioritize the areas of most significant impact, a qualitative overlay to the quantitative analysis as described in a), b) and c) will be important, e.g. through stakeholder engagement and further geographic contextualisation. INTEGRATED ANNUAL REPORT 2022 573 OTP BANK OTHER INFORMATIONS financial health&inclusion as your most significant impact areas, please also refer to the applicable indicators in the Annex. If your bank has taken another approach to assess the intensity of impact resulting from the bank’s activities and provision of products and services, please describe this. The outcome of this step will then also provide the baseline (incl. indicators) you can use for setting targets in two areas of most significant impact. Links and references In line with OTP Bank's ESG strategy, we have set a preliminary target to increase our loan portfolio in green assets to HUF 1,500 billion by 2025. Based on the results of our line with our strategic goals and target setting in requirements, we started by determining a baseline for 2021. impact analysis and As a first step, OTP Bank, with the help of an external advisory firm (Klima Metrix), conducted a pilot estimation regarding its financed emissions. Based on the year-end 2021 exposure, we estimated the group-level GHG emissions attributable to the financing activity. For this first-time calculation, we used the Partnership for Carbon Accounting Financials (PCAF) methodology, a widely used standard based on the Greenhouse Gas Protocol. We managed to include 81.3% of our year-end exposure in the calculation, and in accordance with the PCAF methodology, we have created 4 segments: business loans, mortgages, commercial real estate and motor vehicle loans. All economic sectors were included, but what was excluded - due to lack of guidance - was mainly unsecured residential loans. In terms of accuracy, the PCAF defines five levels, with 1 being the most accurate and 5 the least accurate. Due to data availability issues, the experimental results show predominantly scores of 4 and 5, meaning that the calculation was based on average output at macroeconomic levels and where data were missing or inaccurate, proxies were used. This is a rough estimate, but the best currently possible. Our ability to quantify the impacts of increasing our green portfolio will improve over time, so this will help us to set our PRB’s climate target even more accurately next year and refine it over time. We will seek to refine the results of our future estimates of our financed emissions by expanding the range of data reported and improving the quality of the data already available. This will require collaboration not only between group members, but also with our clients in all countries and sectors of the OTP Group. The aim is not only to increase our green portfolio and assess its environmental impact, but we are also making significant efforts to involve all areas of the bank's business and risk in defining and understanding what is needed to align the bank's long-term goals with the Paris Climate Change Agreement. OTP Bank has been conducting surveys for ten years now to explore the Hungarian population's self-provision habits and behaviour and their responses to various economic situations, on a sample of 1,500 18-70 years old bank account holders. The main average of the OTP Self-provision rose from 34 to 37 points in 2022, the greatest positive change within a year in the history of the surveys. Another important result was an increase in the proportion of people having savings. The survey found that the majority of people consider it important to have savings. 95 percent of the respondents also reported of increases in their expenditures and 76% characterised this increase as "significant". The survey found that most people respond to the economic uncertainty consciously, by cutting their consumption and by increasing their savings to the extent possible, and by working out financial plans. Respondents who prepare financial plans for at least the next month formed the majority again for the first time since 2020. For several years, OTP Group has made it a priority to contribute to the improvement of the financial literacy of the population. We believe that conscious money management and self-provisioning are essential for financial well-being. To this end, INTEGRATED ANNUAL REPORT 2022 574 OTP BANK OTHER INFORMATIONS we have produced general financial education videos on a variety of topics, and several of our campaigns focus on responsible money management. As one of the top retail and commercial banks, we have the responsibility to support the development of inclusive and sustainable societies. We believe we can help more people prosper and enjoy the benefits Financially empowered people of growth by empowering them financially, giving them access to tailored financial products and services, and improving their financial resilience through education. We aim to financially empower more people in the near future. We seek to provide tailored finance to people with less access to credit. We offer solutions to unbanked and underserved groups. We aim to foster social mobility by helping low-income and underbanked entrepreneurs set up and grow their businesses. Self-assessment summary: Which of the following components of impact analysis has your bank completed, in order to identify the areas in which your bank has its most significant (potential) positive and negative impacts?8 Scope: Portfolio composition: Context: Performance measurement: ☒ Yes ☒ Yes ☒ Yes ☐ Yes ☐ In progress ☐ In progress ☐ In progress ☒ In progress ☐ No ☐ No ☐ No ☐ No Which most significant impact areas have you identified for your bank, as a result of the impact analysis? Climate change mitigation, climate change adaptation, resource efficiency & circular economy, biodiversity, financial health & inclusion, human rights, gender equality, decent employment, water, pollution, other: please specify How recent is the data used for and disclosed in the impact analysis? ☒ ☐ ☐ ☐ Up to 6 months prior to publication Up to 12 months prior to publication Up to 18 months prior to publication Longer than 18 months prior to publication Open text field to describe potential challenges, aspects not covered by the above etc.: (optional) 8 You can respond “Yes” to a question if you have completed one of the described steps, e.g. the initial impact analysis has been carried out, a pilot has been conducted. INTEGRATED ANNUAL REPORT 2022 575 INDEPENDENT ACCOUNTANT’S ASSURANCE REPORT ON SUSTAINABILITY REPORTING INTEGRATED ANNUAL REPORT 2022 576 OTP BANK INDEPENDENT ACCOUNTANT’S ASSURANCE REPORT ON SUSTAINABILITY REPORTING INTEGRATED ANNUAL REPORT 2022 577 OTP BANK INDEPENDENT ACCOUNTANT’S ASSURANCE REPORT ON SUSTAINABILITY REPORTING INTEGRATED ANNUAL REPORT 2022 578 OTP BANK INDEPENDENT ACCOUNTANT’S ASSURANCE REPORT ON SUSTAINABILITY REPORTING INTEGRATED ANNUAL REPORT 2022 579 

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